After several years of punishing market conditions, the rise of cheap passive products, the introduction of costly regulations, and falling fees, the mood at Fund Forum earlier this summer suggested that the fortunes of asset managers might finally be turning a corner.
With a rapidly expanding pool of digitally native investors eager to put their money to work, fund managers are increasingly seeking innovative ways to win mandates from these younger asset allocators. Attendees at Fund Forum also learned about the latest developments in the tokenisation space and how this could drive inflows into funds.
Despite the weather not cooperating for what was a very informative and lively Fund Forum, it was great to be back in Monaco and for our team to share our insights across various panel sessions.
The digital natives look to invest
During Fund Forum, Simon Keefe, our Head of Digital Solutions, gave presentations at our stand on tokenisation and the emergence of new digital distribution venues. In his first session he dispelled a number of common stereotypes held by asset managers about young people.
We’ve heard from speakers at previous Fund Forums that many young people (i.e. millennials and now Gen Zs) today were not only cash poor, but uninterested in investing what little money they did have. This has now largely been disproven.
Firstly, many millennials and Generation Zs are about to inherit a record amount of money over the coming decades. It’s estimated that between now and 2045, there will be an intergenerational transfer of wealth transfer of around $84 trillion.
Furthermore, young people do invest their disposable income, but not much of it ends up in the strategies typically run by Fund Forum attendees. Research by the CFA Institute, for example, shows that 55% of US Gen Z investors aged 18 and over primarily invest in cryptocurrencies, allocating on average around $4000.
“In the UK, there are five million people holding cryptocurrencies. The average age of global crypto investors is just 29. Crypto investors are also prevalent in underserved geographical markets,” commented Simon.
However, cryptocurrencies are notoriously volatile, making them unsuitable for long-term wealth growth. Many young investors have recognised this risk. “This investor demographic is maturing and increasingly recognising the importance of diversification,” noted Simon. This presents an opportunity for active managers and distributors to attract these investors.
Reaching out to the new generation
During Fund Forum, our experts also looked at how the asset management industry – through some changes to its operating model – can win over younger investors.
During a panel titled ‘It takes a new ecosystem: The rise of neo-banks and other platforms creating more sustainable value for the end investor and our businesses’ , Edward Glyn, Managing Director and Head of Global Markets, said : “During Covid, many new investors emerged, and they were overwhelmingly digital natives, accustomed to purchasing clothes, music, and movies online. This demographic expects a personalised service, and they want customisation in their investment lives as well.”
Hyper-personalisation is something neo-banks have embraced, often by using artificial intelligence (AI) to improve customer service, remind people about subscriptions, or inform them about financial products based on their credit or behavioural history.
On the fund manufacturing side, personalisation needs to be done thoughtfully, a point made by Brian Godins, Chief Commercial Officer, who was speaking on a Global Leaders panel at Fund Forum.
“While we live in a world of mass personalisation, clients want more for less. The challenge for asset manager CEOs is to roll out products at the lowest possible cost, delivering palatable returns and satisfying clients’ demands for hyper-personalisation. Managers can manufacture bespoke products for clients, but a more sensible approach would be to develop commoditised products and configure them according to individual customer requirements, which technology can achieve,” said Brian.
Regulators look to stimulate tokenisation
The discussion on personalisation naturally led to the topic of tokenisation, which Simon covered extensively during his second presentation, but also on a panel exploring how Blockchain is revolutionising fund issuance and distribution.
Tokenisation can make access to mutual funds and other investment vehicles cheaper and easier, allowing for broader product allocation and diversification, enabling young people to invest in traditional funds alongside their crypto holdings.
Progressive regulations will help expedite tokenisation’s growth, said Simon.
Twelve months ago, regulatory uncertainty about tokenisation was prevalent. However, the mood has changed following several positive regulatory developments. “Forward-looking regulators, including the Monetary Authority of Singapore (MAS) and BAFIN in Germany, are pushing for tokenisation. In the UK, the Financial Conduct Authority (FCA) and regulators in Switzerland and Japan are participating in MAS’s Project Guardian initiative, exploring fund and asset tokenisation use cases,” said Simon.
In the UK, we are closely working with the FCA on asset tokenisation and are active members of the Technology Working Group of the Asset Management Taskforce. The Taskforce recently produced a second report, “Further Fund Tokenisation: Achieving Investment Fund 3.0 Through Collaboration,” which explores ideas like using tokenised money market funds as collateral for non-cleared derivatives and the role of digital money in supporting settlements.
We are also collaborating with MAS on Project Guardian, working with Schroders to develop a tokenised vehicle for Variable Capital Companies (VCCs), a Singapore-based fund structure.
As more regulators embrace tokenisation, so too will the funds industry.
Getting firms onto the front foot
To meet the expectations of tech-savvy clients, the funds industry needs to ensure that its front-to-back-office processes are fit for purpose. Our Digital Investments solution can facilitate this, as Simon discussed during his presentation.
“Twelve months ago, I was at Fund Forum talking about our Digital Investments solution, and since then we have made huge advances by using DLT and tokenisation to digitalise multiparty processes, such as fund accounting, transfer agency (TA), and investment operations, creating a leaner and more efficient issuance and asset servicing infrastructure,” said Simon.
The cost synergies enabled through this solution will lower the barriers to entry for asset managers launching new products, particularly as costs rise elsewhere. Savings on legacy administration tasks can be reinvested to drive innovation, allowing firms to offer a broader range of products to a wider range of clients. A well-organised backend will make it easier for asset managers to meet the increasingly complex and bespoke demands of their investors.
“At Calastone, we are working with asset managers to tokenise their funds on our network and place them virtually with regulated venues and DLT frameworks. This extends traditional distribution models to large distributed markets,” said Simon.
Is this enough?
As Fund Forum drew to a close, it became very obvious that there is a lot for our industry to be hopeful about, a point echoed by Edward.
“One of the questions people often ask me is, ‘are mutual funds fit for purpose?’ The industry has been around for 100 years now, and we have seen a number of interesting initiatives during this time. The tokenisation of the fund wrapper and the underlying assets is just the latest initiative, and one that will further accelerate the Amazonification of the industry,” added Edward.
By digitalising fund issuance, asset servicing, and onward distribution processes, the funds industry will become more attractive to a tech-savvy investor base. This comprehensive digital transformation holds the promise of aligning traditional finance with the expectations and needs of a new generation of investors.
