Asset managers: digitize or die? (part 2)

Last week in “Asset managers: digitize of die? (part 1)” we considered that the evolution of collective investments to be digitize seems to be increasingly inevitable. The article looked into how collective investments schemes have developed historically and also how regulation and the increasing use of AI in wealth management is pressurising asset managers to adopt digitization. This week’s article reviews those asset managers who have or would appear to be about to take the plunge and digitize their funds. So, what are other potential consequences? Some examples of asset management firms which have started or are planning to digitize their funds include:

·      privately bank-owned Metzler Asset Management has issued tokens for a single share class of its German-domiciled Sustainable Growth fund in a controlled distribution pilot, which took place on a public chain.

·      Germany has also legislated for digital securities to exist natively on-chain (without the need for a central securities depositary), and for funds to hold tokenized assets as well as funds to be tokenized at unit level.

·      Archax (a UK-regulated exchange has tokenized the abrdn money market fund.

·      in France, Generali’s fund range is now available digitally on a DLT platform, joining a large group of other fund firms’ listings for investors to select from.

·      in April 2023, the Franklin Templeton Money Market Fund was launched on the Polygon blockchain.

·      with $94billion undermanagement, the US asset manager, WisdomTree Prime, offers nine digital funds using the Stellar or Ethereum blockchain.

·      Hamilton Lane’s $2.1billion Direct Equity Fund on the Polygon blockchain means that, instead of being required to invest $5million, you can gain access to this fund from as little as $20,000.

·      UBS launched a tokenized money market fund in Singapore.

·      Hong Kong is to allow tokenization of securities and regulated funds.

·      Schroders has appointed Calastone.

·      Credit Agricole-owned, Amundi, one of the top three European asset managers with $2.1trillion assets under management, announced that it is to digitize its money market fund.

·      Matteo Andreetto, at State Street Global Advisors, has said: “The ability to fractionalise and digitise ETFs and private assets through tokenisation will be game-changing and something the firm will be looking at.”

Furthermore, there are many firms that offer digitization services such as Tokeny, Digi shares, Inveniam, Polymath, Securitize, Harbor, Archax, Swarm and ADDX - the list goes on. So it would appear that the actual digitization is not a problem. In addition to this, there are also a number of regulated exchanges in a variety of countries where digitized funds can be traded:

·      ADDX - Singapore

·      SIX - Switzerland

·      Archax - UK

·      Swarm - Germany

But interestingly, one of the benefits often touted by those who seek to digitize assets is that blockchain technology is decentralized. But is it really? Given that Alibaba, Amazon, Google and Microsoft control 67% of all cloud services, how decentralized indeed are the blockchains that powered this growing trend to digitization? What may have not been appreciated is the $1.8quadrillion of equities, bonds, real estate, funds and derivatives (much of which could be digitized), and this offers a massive opportunity for the incumbent cloud services providers. The other organisations set to benefit are the traditional stock exchanges around the world, many of which have recently seen a large fall in the number of IPOs and declining trading volumes. But as funds and other assets become digitized, there is no reason why traditional stock exchanges will not upgrade their offerings and also start to trade 24/7.

So, could digitization lead to a decline of funds? Of the 31.7 million people who pay tax in the UK, only 390,000 paid capital gains tax. And, according the latest statistics from the UK government: “Most CGT comes from the small number of taxpayers who make the largest gains. In the 2021 to 2022 tax year, 45% of CGT came from those who made gains of £5 million or more. This group represents less than 1% of CGT taxpayers each year”. Therefore, as we see more of the equities, debt instruments and other assets that are held within a fund become digitized (i.e. accessible on a fractional basis), will we see investors return to having their monies managed within a discretionary portfolio management service, powered by Robo advisors and AI, as opposed to collective investment schemes? One possible reason for this is that investors will save the cost of a fund wrapper (as most investors do not use their capital gains tax allowance) and would have a better understanding of where their money is invested. There would also be the potential for investors to be more engaged by voting at AGMs and being rewarded with shareholder perks - both of which are not usually possible if you invest via a fund.

Understandably, this digitization trend in asset management raises questions about both its impact and future implications. As firms rush to digitize funds, the involvement of major global asset managers demonstrates the global push toward tokenization and blockchain-based assets. However, amidst the promise of blockchain's decentralization, the dominance of tech giants in cloud services raises concerns. Could this digitization revitalize traditional stock exchanges facing declining IPOs and trading volumes? And might it ultimately lead to a decline in conventional funds? With fractional ownership of digitized assets enabling accessibility, will investors pivot towards AI-driven portfolio management for cost efficiency and enhanced engagement in investment choices and shareholder activities? Dictionary.com reminds us that in a phrase adapted from the Book of Ecclesiastes in the Bible, the author complains frequently in the book about the monotony of life. The entire passage reads: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” So, could the rush to digitization herald a decline in the fund management industry and restore the prominence of fund management services, albeit such services being powered by Robo advisors and AI? Subsequently, ought we ask the question: Will asset managers digitize and, in doing so, die..?