The surprising software opportunity Fidelity likes on the ASX

There’s no question that Australian companies have had success with software IP. Just take a look at Wisetech (ASX: WTC) for a great example of a company finding a niche and developing essential software that changes a market.

There’s another opportunity that Fidelity’s James Abela views as holding significant long-term growth – wealth software systems – where the key to success is innovation and service leadership.

If this takes you by surprise, it shouldn’t given the size and detailed requirements for wealth management in Australia.

“Australian wealth is a $3 trillion market. It’s a huge amount of money that we have in our wealth system. All of that has to be held on a software program. 

It has to have a report, there’s tax reporting, and there are a lot of different reports that have to be tracked. Dividends have to be tracked, corporate actions have to be tracked,” says Abela.

In this episode of The Pitch, Abela discusses the opportunity set for wealth software systems, the two companies Fidelity invests in, and the future opportunities for these companies.

This interview was filmed Wednesday 7 August 2024

Edited transcript

Hub24 (ASX: HUB) and Netwealth (ASX: NWL) are the leaders in this space. The growth is about winning market share from the Big Four – the big four banks and then AMP and Macquarie (to make it the Big Six) still have great technology.

It’s more the big four banks where the movement of advisers has started to take place with the fragmentation of the industry. The industry is using the technology stack as a platform to go out and become either an RE or another separate adviser group. It’s a real movement of technology leadership and technology innovation that Hub and Netwealth are giving to the market.

All the others have also provided innovation. It’s a battle for client confidence in the platforms. Errors, speed reports, turnaround times – all these things have become very critical in a client’s mind.

I think Hub and Netwealth have very good systems and that’s why they are winning share. But, the Big Six have spent a lot on technology. Everyone is trying to spend money on the wealth platform technology and it is a very competitive market with all of those Big Six players having their own offering, and some being quite successful.

I think Hub24 and Netwealth are in a good space. It’s a growing market.

Australia’s wealth is a $3 trillion market. It’s a huge amount of money that we have in our wealth system. All of that has to be held on a software program. It has to have a report, there’s tax reporting, and there are a lot of different reports that have to be tracked. Dividends have to be tracked, corporate actions have to be tracked

There are a lot of very fine details and a lot of that requires really good technology so nothing is missed.

What qualities do Hub and Netwealth have that you think are going to continue to differentiate them from their peers going forward?

There’s the financial side and the non-financial side.

On the financial side, they have high returns, good growth outlook and good top-line growth, therefore high ROEs, and high margins. Then they have opportunities to reinvest capital back into their systems to create an innovation leadership cycle. That’s the financial side.

On the non-financial side, it’s really service leadership and entrenchment into their customer bases. There is definitely an element of trust in that whole wealth management space. This is people’s money at the end of the day that you are tracking on software. I think being a trusted source and being a high customer service provider are really important factors when you look at how you are going to service over not just years, but decades.

Those are the really important things that come together – financial and non-financial.

What key challenges do you think are facing key players like Netwealth and Hub?

The technology stack leadership is definitely going to be critical because you still have the Big Six innovating. The Big Four banks, AMP and Macquarie are still innovating and have very good systems so Hub and Netwealth need to be innovation leaders.

So, it’s the software development, it’s the software tracking, it’s the auditing – and we’ve seen the recent CrowdStrike issues. These things can be disruptive and create confidence issues. You’ve got to make sure your systems are top-notch and competitive in the marketplace, and the fail rates or error rates are really low.

That’s where I think the technology and also the reliability of the technology and systems and everything beneath the technology stack needs to be really important and high performance. Innovation and reliability need to hold over many years to maintain leadership.

Outside of the major players, how can investors think about exposure to the growth in wealth software systems?

There aren’t many. Class (Delisted February 2022) was one that I tracked for a number of years but has now been consolidated into one of the larger players. There isn’t much beyond Hub and Netwealth in that wealth management space. There are only funds management or other related exposures, but in terms of wealth management software technology, that’s the only two available in the Aussie market.

Hub24 and Netwealth are in a tight competitive pool. Where do they go once they’ve gained market share and is global an option for future growth?

Global is an option. Someone who is a really strong dominant Australian technology leader and can go overseas and there is definitely potential for them to do that. It’s just that there are different tax systems and legal regimes in these different environments, whether it is, say the US or the UK, but it is definitely possible.

Financials such as Iress (ASX: IRE) have gone overseas and been successful, so I’d say it is possible and it is an option for them because they have technology leadership. The other thing is Macquarie have invested a lot in technology so the pressure for technology leadership could be a limiting factor as you go through the years or the decades. Then the global growth option would open up a new market opportunity for them and would create a new world of growth.

If the technology stack is really strong, it can be exported into other markets such as the US or the UK.

It is an option, but the history of Australian businesses succeeding in the US or the UK – there’s been a lot come back with their tail between their legs and it’s been a lot tougher than they think. That’s the rule markets would struggle with early on. But if they do it and it is considered to be a viable option, even through partnership, then that could be huge. It is something they could consider but there are risks in that path.

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