The rapid pace of technological advances promises to evolve, or even revolutionise, how asset managers and institutional investors conduct their jobs in the coming decade.
AsianInvestor has identified five key areas of change that could well impact the fund management industry over the coming five to 10 years. At the end of that period, asset management as we know it will still be recognisable – but it may well have had a major face-lift.
Following our initial look at product tailoring and then our focus on ESG ubiquity and asset owners becoming tougher external fee negotiators, we conclude by considering the potential of tokenisation for private assets, and the creation of massive, centralised data centres.
TOKENISING PRIVATE ASSETS AND BONDS
Cryptocurrencies have gained a lot of attention in recent years, but the technology that supports them could well end up proving more influential to investors.
The ability of blockchains, or distributed ledger technology, to simultaneously update the accounts of all organisations for a particular transaction is extremely powerful. It also offers itself to new possibilities, including encouraging the tokenisation and potentially liquidisation of private assets.
Today, the general partners who run private equity, or private debt or real estate funds require limited partner investors to provide several million dollars as an entrance requirement to one of their funds. That is effectively a barrier to entry for almost all retail investors, and it also acts as a major stumbling block for smaller institutional investors.
But tokenisation could cure that. Imagine if a fund manager accepts multiple contributions of $1 million from small corporate pension funds, amounting to $100 million. They can submit that as their limited partner bid.
However, each of those bids may also be tokenised into smaller positions, perhaps for as little as $1,000 apiece. Each position would have a unique digital token that represents the full value of that bid. It could then be traded around, creating a secondary market for an otherwise illiquid asset.
Funds could be created the purely invest into the tokenised positions of private equity or private debt funds, providing liquidity for asset owners or retail investors. Plus, tokenisation could give asset owners greater portfolio control, allowing them to shift between assets far more easily.
It could benefit the general partners too, as accepting such positions would help them more quickly raise funds. Essentially, the private asset space could become open to all.
That, at least, is the idea. There are many steps, technological and regulatory, before such a development sees the light of day. But if and when it happens it could greatly broaden how investors utilise private assets.
It may well have ramifications for more regular bonds too, which are also often expensive for non-institutional investors to get into. Tokenise them, and retail investors would have the opportunity to build their own digital debt portfolios.
The success of a lot of technological efficiencies will ultimately come down to how successfully asset owners, fund managers, brokers, custodians and others can access and share data.
That need will gradually drive efforts to universalise data. It could lead to major data hubs.
Asset owners and fund managers alike do not tend to have a full picture of the entirety of their investment exposures. This is because the information is siloed into different fund vehicles, investment partners, mandates, geographies and custodians. Aggregating and interpreting this data is fiendishly complicated.
But the investors of tomorrow may suffer fewer such challenges, provided they enjoy access to the sort of computer horsepower that is needed, and are willing and able to share data.
Doing so would lead to major balance sheet efficiencies. Asset owners could more easily spot where their portfolios are deficient in terms of their assets, or where they are overly exposed. Meanwhile, fund managers could better understand which of their clients are the most helpful or profitable, and better analyse which asset classes or geographic exposures are under- or overperforming in their portfolios.
Combined with the other advances we have looked at, including portfolio tailoring and tokenisation, the ability to share portfolio data may offer investors and fund managers alike more ability to manage risk and build exposures to previously illiquid asset classes.
When combined with a great deal of deregulation, this could eventually allow fund managers or asset owners to enter particular investment criteria and immediately create synthetic asset portfolios.
Meanwhile, for ESG products this sort of data transparency would prove extremely helpful, allowing investors to quickly identify which companies identify with particular sustainable criteria according to the latest available data, and create investment portfolios that highlight such information.
Of course, security issues would also abound. Collecting so much information about individual asset exposures would be very sensitive and thus require major levels of both anonymity and very strong cybersecurity protocols.
It would also raise issues of counterparty risk, in terms of where and how the data is stored. But for all these security challenges, the benefits could be enormous.