Strategic Fixed Income: Disruptive Technology and the Bond Angle

 In Market and Investment Insights

Having attended a recent disruptive technology conference, Rebecca Young, Portfolio Manager within the Strategic Fixed Income Team, discusses interesting start up businesses and explains why it is imperative that bond fund managers pay attention to the evolving risks.

Key Takeaways

  • Industry disruption is happening faster than perceived as startup businesses gain traction
  • There are two reasons why bond fund managers should pay attention to this trend: vulnerability of issuers to disruption to their businesses and the deflationary impact from a macro point of view

I recently attended a disruptive technology conference in London. There were plenty of different businesses that presented from across the technology space. To give you some examples, Lilium was there, who presented, and they are developing an electric flying taxi, through to a company like BenevolentAI, who are using artificial intelligence in their efforts for drug discovery. So they are targeting treatments for the many thousands of diseases that still exist worldwide that do not currently have a treatment.

So you are probably thinking, “Why is this relevant for us as bond managers?” And we think for two reasons. Firstly, in terms of the businesses that we tend to lend to, they are large, stable, mature businesses that can be vulnerable to disruption. So we think it is very important that we continue to educate ourselves about these evolving risks. I was personally very surprised at just how quickly we’re now seeing industry disruption and how rapidly some of these startups are gaining traction. And secondly, from a macro perspective, it is the deflationary impact. So a lot of these ideas ultimately are going to result in driving down the costs of a specific product or service.

So two examples that I did find particularly interesting would be, firstly, Babylon. So they are a health care company, they have developed an app, which uses artificial intelligence to help diagnose health issues. So, on average, for a thousand people that come to the app and enter their symptoms, only 100 then go through to request further assistance in the form of a videoconference with a GP. And they aim to book you in for that videoconference within two hours. And out of the original thousand, only 10 go through to request a physical appointment with a GP. So, the NHS are trialing the use of Babylon in London at the moment and also Babylon offer a paid-for service at 25 pounds per videoconference with a GP or 50 pounds for unlimited consultations with a GP over a year. The Internet giant, Chinese Internet giant, Tencent recently signed a deal with Babylon so that they can use the technology on their own WeChat social media platform. So altogether, we think plenty of potential to help drive efficiencies and contribute towards bringing down the cost of health care.

And the second example would be Revolut. So it takes three minutes to sign up online for a Revolut debit card, so you can use the Revolut app to do that. They send you a debit card in the post and at that point you can load on cash onto the Revolut debit card that you can use while you are abroad to spend. But the key point here is that Revolut offers the interbank exchange rate and they don’t apply any fees. So on average, they aim to save a typical consumer $80 per $1,000 spent versus alternative forms of foreign currency exchange.

So in summary, it is hard to know exactly when the impacts of these disruptive technologies will be felt, but we will continue to educate ourselves about these evolving risks. And we do see deflationary consequences, which fits into our long-term view that we think structurally we are in a low-growth and low-inflation environment, but also respectful that there will be cyclical upticks within that framework from time to time.

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