Musical Chairs



We have backed the financial service platform companies in our portfolios, and we had a great result for the Global Contrarian Fund and Australian Managed Account portfolios following Praemium’s strong update last week. Yesterday it was the turn of OneVue to step up to the plate with a robust update across all business units, with a number of records.

Like Praemium last week, Onevue has broken decisively upwards and new record highs are probable in the months ahead.

The company reported that the Managed Funds admin arm of its Funds Services unit had seen FUA break through the $500 billion mark by the end of September. The pot leapt $13.7 billion on the previous quarter, and $75.4 billion on last year to $502.8 billion. Superannuation member administration FUA reached $2.06 billion, 160% ahead of last year.

Quarterly platform services fund flows exceeded $500 million for the first time, while funds under Trusteeship are closing in on $10 billion. The market appreciated the strength of the result, with the shares 4.6% higher at 69 cents.

Similar to Praemium, the strong quarterly update from OneVue follows on from a strong 2017 for the company in which all business units are now profitable at the bottom line. Given that most of the company’s cost base is fixed, ongoing growth in FUA with have pronounced impact on profitability.

I maintain a positive stance on the shares which we hold within the Fat Prophets Concentrated Share and Small/Mid-Cap Managed Account portfolios. We also know the quality of the platform first hand and use it in our own Wealth Management business. The stock has also been a good performer for our analyst team, having been first recommended at 40 cents, and reiterated as a buy a few weeks ago at 60 cents.

Our positivity towards the platform companies is also underpinned by a powerful thematic within the Australian financial services industry. The country’s superannuation segment alone is an unstoppable freight train. Deloitte for instance forecasts that the super pot can reach a value of A$9.5 trillion by 2035, representing an annual compound rate of 8.1%. This is also as the mandatory employer contribution rate (currently at 9.25%) is expected to increase to 12 percent by 2025.

This will create substantial scaling up opportunities for a host of participants. M&A activity is also sharing the love around, particularly as the banks and insurers look to reposition their businesses and balance sheets. The door has opened further here for IOOF which has purchased ANZ’s superannuation and financial planning businesses for $975 million.

This looks like a great deal for IOOF, which is a stock we hold within Fat Prophets Australian Share Income, Concentrated Australian Share and Small/Mid-Cap Managed Accounts. Our analyst team first recommended the stock at $5.65 and reiterated a buy at $10 in June. The stock closed yesterday at $11.26.

IOOF has launched a $450 million capital raising to fund the deal, and CEO Chris Kelaher could not hold his delight, with ANZ also benefitting. A 20-year agreement will see the bank distribute the wealth manager’s products to its several million banking customers. Mr Kelaher chimed “It’s the partnership that is the icing on the cake. You can look at existing profit and what you’re purchasing, but it’s the growth piece into the future that’s exciting,”

With a powerful underlying thematic (and banks insurers slimming down and refocussing) it is not surprising that we are also hearing of foreign suitors lining up. AIG is reporting to be considering a bid for Suncorp’s life business. Stay tuned!

An AI arms race

Nasdaq-listed shares of China search giant Baidu have continued to surge in trading over the past week, taking the gain over the past month to 16% and year-to-date gain to 66%. As we touched on in yesterday’s Daily, the company has reportedly chosen three banks to IPO its video streaming platform iQiyi, called by some the Netflix of China.

The IPO should unlock some value for Baidu shareholders, but it is perhaps the company’s deep and growing expertise in artificial intelligence (AI) that is exciting investors the most.

Baidu is the largest holding in the Fat Prophets Global Contrarian Fund, a core holding in the Global Opportunities and Asian portfolios.

The Financial Times this week reported on Chinese authorities’ intent to ensure China emerges as a superpower in AI.

China has lagged the US to date in artificial intelligence by several metrics (funding, number of companies and patents), but with the area now a focus and some of China’s advantages investors should at least be keeping its AI leaders on a watch list. Baidu has bet massively on AI and another of the core holding in the Global Opportunities portfolio, Tencent Holdings, is ramping up its efforts aggressively and has the mammoth cashflows required.

Beijing wants to make AI a $150 billion industry by 2030 and some believe the country could overshoot those levels well before that date.

Focusing on Baidu, the company has deepened its push into AI over the past few years as founder and CEO Robin Li is convinced it is where the major potential breakthroughs in a myriad of markets lie. Last year at the World Internet Conference in Wuzhen, China, Mr Li stated that, “The age of the mobile internet is over. Future opportunities lie in artificial intelligence.”

Self-driving cars are one of the areas Baidu is leveraging its AI expertise:

Source: Baidu

China has around 750 million ‘online citizens’ and many of the world’s AI experts. The data Baidu captures from its online search business is a major advantage for Baidu, just as it is for Google (a core holding in the Global Opportunities portfolio via parent Alphabet). This is as data from searches are broad-based and cover a vast number of topics.

A deep pool of data is perhaps AI’s most important input with so-called deep-learning algorithms using reams of data to “learn.” The more data that is available the “smarter” these algorithms generally become.

Adding to the value of the data that Chinese online citizens provide is the fact that most go online using smartphones. The data from all the sensors and the location of users when they go online, order products and services etc., is generally more useful than from a desktop computer.

Baidu has been adding image and voice search functions to capture even more useful data about user habits and preferences. The company has made significant strides, claiming 97% accuracy in voice recognition and 99.7% in facial recognition

China’s vast population also provides a deep pool of research talent. Many of its diaspora have returned home from top notch universities and roles at major corporates around the globe over the past decade. In addition, many Chinese universities have shot up the rankings and students in the country are well-known for their expertise in hard sciences such as maths and physics, as well as in language translation.  These provide the key ingredients for AI expertise.

Baidu has reportedly built up a 1,700-member AI team and has four research labs, in China and Silicon Valley. Of the US$3 billion or so Baidu has spent on research and development over the past 2.5 years, the “majority” has gone towards AI.

We expect Baidu to continue to be at the forefront of AI technology development, with substantial new revenue streams from AI-linked projects to supplement its strong core search (advertising) business over the next decade.

Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in Praemium and Baidu.

Carpe Diem!

CEO | Fat Prophets
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