Alpha opportunity: Introducing alternative asset classes to Asia
Institutional fund managers and family office’s seeking performance and stable returns are exploring opportunities outside of Asia’s traditional asset classes, as rising interest rates bite into returns, according to FinEX Asia founder and CEO, Maggie Ng.
While many of the world’s largest asset managers have bought into the fundamentals of the consumer finance story, not everyone understands how to make alpha from it. Most mainstream houses are more comfortable with traditional bonds, equities, exchange-traded funds (ETFs), occasionally venturing into structured products.
Hong Kong-based company is comfortable with consumer finance. The fintech asset manager also has offices in mainland China, Taiwan and Singapore. Working with its technology partner, Dianrong, a prominent China marketplace lender, the asset manager has created a platform which allows Asian investors to access the US consumer credit story – mortgages, personal loans and credit cards receivables.
With more than 20 years’ experience in banking and consumer credit, Ng says now is the perfect time for investors to get familiar with this asset class.
“Over the past 10 years, the bond market has done quite well. Now the Fed is raising interest rates and that’s driving the bond performance down, so investors need to look at alternatives,” said Ng.
Ng believes consumer finance is attractive because it provides both diversified and stable returns. The asset manager’s appealing returns are already being noticed, with FinEX targetting yield of 7.5-8%, well ahead of all major fixed income indices. Returns from loan repayments are steady and preset, meaning they are not affected by the usual peaks and troughs of daily market fluctuations.
Using tech to create alpha
Formed 18 months ago, the asset manager is licensed to conduct general asset management by the Hong Kong Securities and Futures Commission (SFC). It manages around $200 million in two products, fixed income and private equity through its digital platforms.
The digital platform acts as a one-stop-shop for investors, providing information, advice and access to this market. Data from the US market is gathered in real time, 24/7, with the help of artificial intelligence (AI). Statistics provided by AI’s deep dive into US consumer and locally generated data help the asset management team make informed recommendations about loan selections. Using AI to sort through thousands of potential loans based on consumer information and combines this with layers of local information such as state unemployment rates and local conditions. For example, a US city hit by a natural disaster like a hurricane, will record a corresponding spike in non-payment of debts. Such an event, combining data and team knowledge, will be incorporated into the asset managers decision-making process.
The team then provides investors in Asia with information and advice plus due diligence, risk assessment and tax treatment plus after sales service.
One area where AI is particularly useful is to analyse data about an individual US consumer seeking a loan, and to assess that person’s Fair Isaac Corporation (FICO) credit score (a measurement used by lenders to work out a borrowers’ ability to repay or potential risk when extending credit).
Investors can tap into their investments at any time using FinEX Asia’s app that daily updates a pool of more than 10,000 loans. Investors can access funds, research details about loans, track dividend payments and statements and see beyond their monthly returns to examine details such as whether a specific individual has met their loan repayment.
This level of transparency means investors can make informed decisions about their investment which is typically held for between one to three years. The digital platform also operates in both English and Chinese.
Crucially, Ng said the company’s product is spread across a wide asset class. “If you have $1 million to invest, you can probably buy two bond tickets, but our consumer finance is extremely diversified, and the ticket size ranges between $2000 to $20,000. Greater diversification means each loss size is less,” Ng said.
From an investor’s point of view, consumer finance presents an alternative source of yield when interest rates are rising. Ng believes the asset class suits the professional investor with at least a $1 million net worth. Once investors see steady growth in their investment, Ng said many begin to top up their investment each month.
Consumer finance is also growing in popularity for those seeking personal loans since digital platforms provide consumers with interest rates that are lower than credit cards or banks. Today’s savvy US consumers go online to click and compare loans, terms and conditions.
“People’s behaviour has changed from offline, to online. They’ve realised online credit is much cheaper, so their behaviour has changed,” Ng said.
Long timeframes create predictability
According to Ng, one of the key attractions of this asset class is the capacity for analysts and investors to predict losses. This compares favourably to the relative instability and sudden fluctuations seen on stock markets when they react to events, debt crisis, politics, trade wars and geopolitical fallouts. She said market signals, good or bad, provide consumer finance asset managers with plenty of warning.
“Consumer finance is strongly correlated to unemployment rates and isn’t reactionary like markets. In the US, the unemployment rate is now around 3.8 %. When the unemployment rate falls, consumers’ ability to make repayments increases, making this asset class increasingly attractive. The US unemployment rate does not shoot up overnight, it increases or decreases gradually over time. This gives investment managers plenty of lead time and to react to it,” Ng concluded.
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