Case study: Small things can grow to powerful titans

bondsmart has an international perspective and works across many markets. We often come across an interesting story that fits with our mission and has had an interesting impact not known widely.

Yu’e Bao (pronounced “Yoo Uh Bow”) arrived in 2013 and has turned cash management into a serious business. The business is connected to AliPay, the huge payment gateway in China. When you understand the name in English the business case becomes obvious. Yu’e Bao means “leftover treasures” because it was originally promoted as a way to invest money left in the AliPay wallet into a fund to earn interest. It became the world’s largest money market fund in 2017. Its humble beginnings are what led us to consider looking back to its start to reflect how its immense growth led to policy changes and altered the net interest margin game for conventional banks in China all by adding a new product into a financial app.

Spare cash was the aim at the beginning. It offered an interest rate that was better than a deposit account and easy switching led Chinese consumers to begin to use it like a checking account. Proposition = micro transactions into a pooled vehicle to earn better returns on your spare money. China has a massive saving ratio so the top down demand for such a product was easy to see. Cash deposits are a vanilla asset with no bells or whistles but the friction to move it from one account to another and shop around for the best rates of returns make it difficult for any entrant to achieve any success. Though designing a superior investment product then creating ease to access it are at the centre of its tremendous growth. The high-interest rates that it offered were possible due to money market diversification rules in China that allowed more higher-yielding assets. China’s regulators and policymakers needed to change these rules to reduce systematic risk to the deposit market given the growth of the money market fund.

The competition reply has been to develop Fixed Maturity plans offered by wealth groups to compete, often mixing some leverage to increase returns. These are different to a money market fund, then a money market fund is different from a savings account. One in three households use Yu’e Bao data suggests and most of the investors are individuals. Compare this to the largest money market fund in the USA and its mostly institutions that are invested. Yu’e Bao drive into the consumer market has been successful because of the link to the payment gateway so suggesting consumer growth means linking into infrastructure that is connected to a consumer group you cannot replicate independently or directly. This encourages fintechs to work with financial institutions that have a large client base themselves and space in their product shelf for a new service/product that reduces the parcel size and is an easy access point, hallmarks we feel of bondsmart.

Bridging the wholesale – retail divide

Most industries have a supply chain from the distributor to the wholesaler to the retailer to the consumer. At each stage the minimum quantity gets less until at the consumer end they can buy a single item.

The problem with financial services is that sometimes the consumer does not actually get the same product as the wholesaler sells.

The retailer often repackages it in a different format and gives the consumer something else. In the case of direct bonds, the consumer most frequently ends up with a mutual fund and no way to get a bond.

Improving the structure of bond markets for smaller investors is our primary goal. Retail investors suffer because they pay much higher prices than institutions do and rarely have access to the same securities. This differs from equity markets where every investor, large or small, can buy a share of Apple Inc at the same price at the same time. By “retailing” through co-ownership wholesale corporate bonds, which tend to have minimum subscriptions of £100,000 that’s obviously a deterrent to private investors, we are opening the market to more investors.

Even for wealthier investors the onerous capital outlay to buy a single wholesale bond results in a lack of ability to diversify. Subscribing for smaller lots allows retail investors to enjoy the benefits of yield/return certainty that comes with investing directly in corporate bonds yet still enjoy the diversification benefits too.

How we work: The crofting for savings

Let’s continue our series of short stories by choosing a new example to explain what we do in a simple manner. After picking the cake and allotment example this time we are north of the border, in Scotland, crofting.

How does it work?

Crofting has been popular in Scotland since the 19th century, especially in the Scottish Highlands. This clever idea is to make people – usually farmers living in the same village or town – collaborate together to run a small-scale food production operation and by doing so reduce the costs, increase efficiencies and have the benefits of a local production.

How do we apply this concept?

We are taking the same original idea and applying it in a bigger scale on a different market to reduce the cost of buying a corporate bond for the smaller investor, who can’t afford this kind of product.The usual threshold to buy a bond is £100,000 so much like buying a masses of land to run a farm is prohibitively expensive to most of us.

What we want people to create as an output by working together is not food, but income.

By helping you – a smaller investor – collaborate with others we enable a group of people to purchase a fraction of a bond and by doing so unlock access to the corporate bond market so more investors can find a good alternative to the traditional products proposed by the market.

The main result is almost the same as the original, people were able to produce food in a different way allowing them to be more independent while being part of a community. We are helping you to produce income for your retirement and contributing to ease off the effects of the saving crisis in the UK.

How we work: allot in community growing

Here is the second article in our series taking the complication of the financial world and explaining our purpose in a non-financial sector example.

This time around, we visit the quintessential British allotment. Previously we were sharing cake.

An allotment divides a field into parcels where individuals can grow their own produce as part of a community initiative. The allotment members are part of a community by collaborating together. One famous example would be how people use the roofs in New York to produce honey or salads. In America allotments are often called community gardens.

Nowadays, most people live in cities with large densities so land is expensive – the average price of a square meter of property is £2,216 in the UK. So for anyone wanting to grow something but does not have a garden buying a piece of land can be costly and unproductive as land is rarely sold in small sizes. So Council’s and co-ownership societies have taken a piece of land and put it into parcels that are rented by a keen grower to maintain and grow produce. Breaking the larger piece into smaller chunks reduces the threshold to the person most likely to be interested. Its also an efficient method to use a resource that may be held back from public use or be wasteland.

In our case, instead of sharing a field together you will share a corporate bond by buying a fraction of it, reducing the cost of ownership for everybody but receive the full reward. We are making you collaborate together, not to produce locally grown vegetables or fruits, but to help you produce income by using your savings as the fertilizer to make your income grow.

With this concept of fractional ownership of bonds we want to help you start to harvest income in a collaborative way and together we build a community of savers.

How we work: a piece of cake

Financial jargon is a curse of the investment profession, turning the intangible into PhD rocket science. So in a short series of articles we want to take our business and explain it in terms that are far more tangible to everyday life.

It is hard to explain an idea clearly without being dry.

We believe describing a concept by using a simple example is the best approach to show what we do.

Our goal is to give you an opportunity to enjoy a cake currently not available to you or most ordinary people. Unless you are rich enough to have access to an exclusive club you are not let in. The cake is supremely expensive to buy so you need people to share the cost to enjoy a slice.

Here’s a tasty story. You want to go to a party, where everybody else wants to go, to try a quadruple chocolate cake, everyone’s favourite. Arriving at the event the front door is locked and you are with most people waiting outside. Even worse, only a few can enter because they have enough money to buy the cake which costs in excess of £100,000.

You are excluded from the party and from buying a slice of the cake. We come to the rescue to unlock the door and by grouping you with others everyone can buy it and you get a slice. This is the power of co-ownership.

By allowing you to buy a fraction of the cake, instead of the whole, you will be able to savour it with others and because of the setup of our business you get VIP access to the party.

This is how we help investors earn a better income. In this example, the party where everyone wants to go is the closed world of professional fund managers and the cake is corporate bond which requires a minimum investment amount of over £100,000 so we help to make it available at a lower cost by buying the whole and making slices available.