How The AltFi Fintech Index outperformed 94% of funds in 2023
Fintech stocks may be still below their 2021 highs but research by AltFi suggests strong outperformance in 2023, writes Daniel Lanyon
Is fintech a good investment? In 2023 it is one of the best.
The AltFi Fintech Index has returned 14.3 per cent in 2023 so far.
While this is an impressive figure for most years, it also stands out starkly against most public equities for 2023 so far.
In fact, the AltFi Fintech Index has beaten 94 per cent of funds investing in listed securities available to UK investors., according to data from FE fundinfo, in terms of total returns net of fees.
This places it in the top decile of performance for the year to date of c.12,000 mutual and exchange-traded funds (ETFs) as well as investment trusts.
This c.12,000-strong funds universe includes all mutual funds in the Investment Association funds universe, and investment trusts, as well as offshore funds and Exchange Traded Funds (ETFs) that are allowed to be sold in the UK. Leveraged funds were excluded.
Just under two-thirds of these funds made a positive return with the best performers generally geared towards tech and AI stocks as well as Japanese equities.
A good investment?
Whether or not fintech's grip on investors, mainly VCs and angel investors, over the past decade is justified i.e is it a smart place to invest is a simple question with a complicated answer. Most fintech investors over the past decade have backed private companies promising explosive growth prospects.
This can in extreme cases lead to returns of many tens and even hundreds of times an original stake. Revolut for example has seen its valuation swell so substantially that early investors in its crowdfunding round in 2016 have seen up to a 600x return…on paper.
That reality of potentially stellar returns is in a majority of cases unrealised, with two-thirds of the total market value of over $3trn still tied up in fintech still in privately held companies, according to Dealroom.
Something of a bonanza in fintech stock market listings in 2021 brought many companies into the public markets and therefore offered a potential exit for investors.
However, since the close of 2021, fintech companies have taken a huge hit overall with the AltFi Fintech Index down 58.6 per cent in 2022.
This crash in public valuations means all of the c.60 constitutes in the AltFi Fintech Index are still to recover from their 2021 highs in their share prices.
In 2023, however, a recovery has begun.
Some of the rally in fintech stocks in our index can be attributed to improving sentiment to growth focused stocks as part of a soothing of the macroeconomic environment i.e inflation appearing to be tamed by central bank's interest rate rises.
So too can some of it be attributed to a crypto rally.
There have been some notably very strong rallies in a number of well-known companies, many with a crypto connection as a regulatory easing in the US towards crypto has been accompanied by a rallying price of Bitcoin.
But in many cases, this is also being driven by strong fundamental growth in revenue and profits as well as bullish analyst predictions. The market looking on more approvingly to the actual performance of the companies themselves.
Underlying the recovery, though is a huge disparity in performance with more than 10 companies seeing their share prices double in 2023 so far with some who have seen further plunges. This year 17 out of 60 of the current constituents have seen their share prices fall.
Also, just under a third of index constituents' share prices are still down more than 50 per cent since their highs.
What is clear is that while a full recovery has not yet materialised in full, something of a recovery or bounceback has begun. Nonetheless, with the AltFi Fintech Index 64.5 per cent off its peak in September 2021 this recovery still has a long way to run.