Nu approach to banking
Managing money through a smartphone has become commonplace for many people as banks have expanded into apps for easier access. But now, purely digital banks have carved out a space in the market, and in some regions, allow people access to a bank account for the first time.
Sara Moreno, fund manager of the PGIM Jennison Emerging Market Equity fund, was drawn to this potential for financial inclusion with Brazil-based Nubank, which began as a credit card issuer and has now expanded into a range of banking services as it aims to become Latin America’s largest financial services provider.
While Nubank, trading under Nu Holdings, has remained almost level in share price over the past five years, in the past calendar year there has been a 56.9% increase to $11.83 (£9.32).
Moreno said when Nu was finding its footing, the company applied a unique strategy when it came to approving customers: new members had to be referred by a friend to join, similar to a club.
“It’s the concept of ‘tell me who your friends are, and I’ll tell you who you are’. And that’s how the programme started. There was a long waiting list, and by getting to know you first, then [the bank was] more comfortable getting to know your friends and your family. But it also created this allure of, ‘When am I going to get the invite?’.”
One of Moreno’s analysts also decided to join the app to see what would happen when he stopped making payments. Instead of letting him continue, the bank sent notes mentioning the lack of payment and providing a variety of instalment options to allow him to put payments back on track.
While Nu built its base in Brazil, the company is now expanding into Mexico where Moreno believes there will be a second market ripe with opportunity.
“It goes back to the addressable market and it’s so large. Mexico is 125 million people and half of them don’t have a bank account. So it’s that ability to serve a customer at a very cost-efficient level with much better information.
You start by giving them a little loan. The average revenue per user is not very high, but once you start stacking more products, those numbers start to pick up,” Moreno said.
The idea of product stacking is where Moreno believes Nu will be able to grow margins and continue to expand once it has built out its consumer base.
“It’s just like any other internet platform. It’s about servicing your customer just a bit better than at a bank. But these companies service you on a much better level and they can leverage technology very efficiently,” Moreno said.
“They’re moving to payroll, secure lending. They can then bolt on asset and wealth management and do a lot of layering on. That’s the beauty of ecosystems that are digitally native, you can then start to stack on that. And because cost-to-income ratio is so low, the traditional bank can never get there.”
New City is punching above its weight
Ian Francis, manager of the £288m CQS New City High Yield fund, believes the trust’s ability to take part in smaller debt issuances is a key factor in its long-term outperformance against its larger peers.
Francis argues that due to the fund’s size, it can afford to be more nimble than larger funds in the space, allowing New City to take advantage of smaller debt issues its bigger peers wouldn’t usually be able to, due to being forced to buy up the entire debt issue and shoulder unpalatable levels of risk.
“If you’re a larger asset manager running a lot of funds, you have got to have the big issues to play,” he said. “You can’t really play in anything under £250m, which is quite a big space.
“In our top 10, we have got Aggregated Micropower, which produces the biomass boilers for local authority buildings and schools. It’s been there for a long while and has an 8% coupon.”
Francis has managed the investment trust’s portfolio since 2007. According to the trust’s latest factsheet, its Aggregated Micropower coupon makes up 4% of the trust. Meanwhile, its largest position is in a Co-Op Bank coupon which makes up 5.63% of the portfolio.
“Another [smaller issue] would be REA, which produces sustainable palm oil. It’s a very well managed business and we are big holders in that.
“Elsewhere, we do have some deals out of Scandinavia, such as Gaming Innovation Group, which is quite a small one. Cab Online, which is Swedish, but a lot of its fleet is electrical, so it is really bringing the green element to [the sector].”
He added: “Again, you can’t hold any of those if you’re a larger name and running billions, so it allows us to be fairly flexible with what we have. We can look at something like a $75m issue.
“The minimum size I consider is £50m, in which we might have a million pounds. Because, while we buy to hold, we want to be able to get out if it goes wrong and liquidity is an important factor.”
Overall, 85% of the trust’s portfolio is currently made up of corporate bonds, while the remainder comprises preferred shares, equities and convertibles.
According to the Association of Investment Companies (AIC), the trust has returned 32.6% over the past five years compared with the AIC Debt – Loans & Bonds sector average of 18.9%. It currently trades at a 6% premium and has a dividend yield of 8.62%.
On the back of a competitive bidding war for Hipgnosis Songs fund, New City recently took profits from its stake in the music royalties investment trust and placed them into the Next Energy Solar fund, which traded on a 30% discount gave a yield of 10.9% at the time of the transaction in April.
Nikko invests in post-Covid wanderlust
As millions gear up to spend their summers abroad, the Nikko Asset Management Global Equity team is excited about the prospects for global travel stocks.
The sector was hit hard by the impact of Covid restrictions as flights and holidays ground to a halt. Coming out of the pandemic, the longing for ‘revenge travel’ saw demand soar over the past two years.
While some may consider this demand spike to be a ‘late-stage’ cycle, Nikko AM global equities portfolio manager Iain Fulton believes there are still opportunities in the sector as consumers continue to spend on overseas travel.
“We had such excessive consumption of goods during the pandemic and under-consumption of services,” Fulton said. “That balance has largely redressed, but we think that while consumers are still in fairly reasonable shape, there’s a high propensity for them to continue to spend on experiences and travel.”
“We particularly like Booking Holdings,” he added. “Booking has been really successful for us. We bought it coming out of the pandemic as we recognised that travel was definitely going to come back, and there was a lot of pent-up demand.
“Shares had obviously struggled during that period where no one could book trips, everyone had these deferred holidays that had been cancelled and so there was a fallow period. Booking used that period to acquire and grow its market share and to push into new areas such as alternative accommodation and car rentals along with flights.
“That created a bigger addressable market, and it is growing into that. That position has always been pretty meaningful in the portfolio since early 2021. We’ve taken a little bit of profit along the way as it’s performed well, but it remains meaningful now.”
Since falling to a five-year low on 20 March 2020 at the onset of Covid restrictions, the Nasdaq-listed stock has risen 238.8% up to 21 June of this year. It is up 14.6% so far in 2024.
“Importantly, Booking Holdings is also taking market share from Airbnb within the alternative accommodation market,” Fulton added.
“A significant portion of the business now is in alternative accommodation, and that has allowed it to take a larger share of the booking wallet.
“That was all while in a company that was priced as if this was a cycle and it was going to mean-revert, but that valuation has actually continued to hold up and return on capital has recovered now to above where it was in 2019. It has acquired very well through that downturn, putting it in a stronger position as we’ve come into this cycle right now.”
The Nikko Asset Management Global Equity fund is a top-quartile performer over one and five years, according to FE fundinfo data.
This article first appeared in the July/August issue of Portfolio Adviser magazine
