High Five! The top 5 fintech stories we’re following this week

5 trends we're tracking in finance

 1. Wall Street turns on the fintech heat

If 2015 was the year of fintech Star Wars, of the upstart firm taking on the big boys, 2016 could be the Empire Strikes Back.

The largest financial institutions are indeed rising to the occasion, developing new products, striking strategic partnerships, and advancing the ball.

Of global major banks, Spain’s BBVA is one of the most active investors and acquirers in the fintech space. Scarlett Sieber,who is part of the business development team for the bank’s digital business, joins us on the Tradestreaming podcast to discuss how (and why) she is building a financial technology ecosystem.

What happens when the largest credit card issuer partners with the largest gas retailer? JPMorgan’s Chase Pay landed a deal with Shell, giving the upstart digital payments platform access to 20 million daily customers.

Barclays revealed plans that showed serious intentions about banking Africa, bringing potentially 1 billion unbanked folks into the financial fold.

2. Fintech is competitive and, sometimes, destroys value
Wall Street has a lot of work to do – for example, today’s brightest are less likely to want to work at hedge funds. (That’s not deterring Goldman Sachs, though, from rolling out a new video format for on-campus recruiting).

Also, it can’t be easy heading up the largest player in the actively-managed funds space, either. BlackRock’s Larry Fink has a ringside seat, witnessing the outflows of actively managed capital, flowing into passive strategies. Active managers are feeling the pain of watching more productive revenue streams evaporate.

Right now, it seems servicing clients and protecting long term franchises is a good start.

3. Why video banking is the fintech trend to watch

More so than bitcoin or other sexy fintech technologies, video banking is already here and changing the way customers, and banks themselves, interact with financial services. We’re quick to (falsely) compare video banking to a Skype-powered teller, but it’s really so much more.

Video banking is about creating real experiences, putting a human face on digital banking. It’s good for customers and that shows — video banking still has some of the highest conversion metrics of all channels. So, in addition to creating operational efficiencies, video banking also has important security implications. Lastly, video banking technology is also helping some of the underbanked — like people with hearing disabilities — get serviced like other bank customers.

4. With new bank partnerships, TransferWise tries for transparency

As customers clamor for more from their financial service providers, small players of the big financial game are responding with their own versions of transparency. Transferwise is the horse to beat in the online money changing business with over 600 routes in 35 different currencies. The startup claims it has over a million customers conducting $750 million worth of transfers per month.

But that’s peanuts compared to the $5.3 trillion in forex transacted daily. Transferwise has big aspirations and to get there, the firm launched a new partnership strategy that would bring the company’s currency exchange tools to other online banking platforms. So far, it looks like that strategy is working.

5. The new virtual reality of shareholder communications

Berkshire Hathaway is known for its lively annual shareholder meetings, featuring everything from a ping-pong match between chairman and CEO Warren Buffett and Microsoft cofounder Bill Gates to discount jewelry shopping. A sign of the times, the firm live streamed its event this year. Communicating with investors has come a long way.

When it first launched its virtual shareholder meeting services in 2009, four companies held such meetings. This year, Broadridge Financial Solutions is expecting to facilitate meetings for 200 public companies, 80% of them virtual-only and 20% hybrid, or a mix of in-person activities and an online broadcast, like Berkshire Hathaway did.


When following the fast money can be a good long term strategy

Stone Street and The_Analyst had an interesting piece yesterday that appeared on Zero Hedge.  Entitled Financial Voyeurism, Why You Can’t Beat Fast Money, the piece took to task all the excitement surrounding hedge fund’s public 13F filings (.pdf) every quarter.

According to Stone Street:

funds and asset managers with greater than $100 million in assets under management are required to report their holdings. The list includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed in funds shares of closed-end investment companies, and certain convertible debt securities. Short positions are NOT included in the 13F. In addition, managers can request confidential treatment of their filing if they feel that their strategy would be compromised by the disclosure. This includes circumstances where the manager has an ongoing acquisition or disposition program. Confidential treatment can last for three months to one year. Lastly, it is important to note that the 13F must be filed no later than 45 days after the end of the quarter. Most funds wait until the deadline to report, as such they are lagging indicators.

The issue is that clearly, investors blindly following 13F followings in an effort to replicate hedge fund portfolios are missing crucial information.  Beyond the lag between buying and filing, not all the fund’s holdings appear in these filings.

So, the incessant race in the blogosphere to analyze these reports for any changes in holdings appears to be somewhat futile.  Fast money momentum players look to piggyback portfolio changes of guru investors in the hope that the market has not fully incorporated this information into current prices.

But, it works

The thing is, with certain investors like Mr Buffett, this strategy actually works.  According to a study I quote in my book, Tradestream, a piggybacking strategy that incorporated only positions included on public filings would achieve alpha close to that of Buffett’s actual portfolio.

The researchers found that Buffett, although touted as the king of value investing, was actually running a growth portfolio.  From Martin and Puthenpurackal’s Imitation is the Sincerest Form of Flattery:

An investor who mimicked the investments from 1976 to 2006 after they were publicly disclosed in regulatory filings would experience statistically and economically significant positive abnormal returns using various empirical tests and benchmarks.  This indicates the market under-reacts to the initial information that Berkshire Hathaway has bought a stock and is slow in incorporating the information produced by a skilled investor.

I understand that Buffett takes larger positions and his holding period is longer than your typical hedge fund.  And that matters.  It would be harder to replicate portfolio performance in a fund like Renaissance that has huge turnover in its portfolio and very short holding periods.

But there are a lot of funds that take bigger, more concentrated positions, like some of the Tiger Cubs, Paulson, Ackman, etc.  Sometimes, even just mimicking a fund’s best idea works.  What these blogs and services are doing in scrambling to reveal and analyzing quarterly filings comes from a good place but needs to be put in context.

Do it, but with class and rigor

I think the point here is not to throw the baby out with the bathwater and poo-poo portfolio replication in general.  On the other hand, mimicking anything that moves — cloning any hedge fund manager — doesn’t make sense either.  That’s dumb money.

What I’ve done after publishing my book is move more and more into rules-based portfolio replication.  But I did it with rigor. I  identified firms that take concentrated positions and hold onto them.  I them backtested them using AlphaClone (see why I called AlphaClone “the cure to investor insanity“) to determine which strategies come closest to mimicking their own performance.  For some funds, it’s their largest holding.  Others performance comes from the largest new holding.  Other positions include the most widely held tech stock, for example.

These portfolios do work but they require vigilance and methodology.   See the performance of one of our portfolios, the Tradestreaming Guru Strategy.


Financial Voyeurism, 13-F Chasers: Why You Can’t Beat the Fast Money (Stone Street Advisors)

Martin and Puthenpurackal: Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway (SSRN)

Cohen, Polk and Silli: Best Ideas (SSRN)

Top Warren Buffett resources

Warren Buffett is an investing legend to almost 3 generations now.  Here’s the best way to learn from and about Warren Buffett.

About Warren Buffett

Wikipedia: Warren Buffett: everything you wanted to know about Buffett, the Oracle of Omaha
The Snowball: Warren Buffett and the Business of Life (book): written by Alice Schroeder, former director at Morgan Stanley, hand-picked Buffett biographer

Buffett on Forbes’ Richest People list

About Buffett’s investment strategies

Berkshire Hathaway’s shareholder letters: Go to the source for inside understanding of how Buffett looks at his own business and investing in others

MarketFolly: Buffett’s portfolio: Monitor the ins-and-outs of holdings in Buffett’s investment portfolio

Buffettology: the previously unexplained techniques that have made Warren Buffett the world’s most famous investor (book): Perhaps the best of the Buffett books, Buffettology is a great resource for investors to learn how Buffett values companies, complete with formulas

Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing (book): With Buffett Beyond Value, you’ll learn that, contrary to popular belief, Warren Buffett is not a pure value investor, but a unique thinker who combines the principles of both value and growth investing strategies.

Warren Buffett Resources

CNBC channel on Buffett

GuruFocus’ tracking of Buffett’s investment holdings

Validea’s Buffett Portfolio: Screening for Buffett-like stocks and performance


Buffett takes heat on ownership of credit rating agencies.

Warren Buffett speaks to a class of MBA students.