How distributed ledger technology is unlocking the future for managed funds ______

Blog / 11 Feb 2022

Teresa Walker, Managing Director, Head of Australia and New Zealand, Calastone

DLT to drive value up and costs down, says experts at the 2021 Australian Calastone Connect Forum

At last year’s Calastone Connect Forum, we challenged ourselves and our industry speakers to think about whether we are doing enough to secure the future of funds management in Australia. How does the managed fund industry ensure it wins the hearts and minds of the investors of tomorrow against a backdrop of declining numbers paying for advice and a groundswell of demand for digitally accessible options? How do we create a secure foundation for the disruption that lies ahead?

A survey conducted by consulting group Accenture earlier this year found that 95 per cent of asset managers said that technology, data and digital capabilities will be key differentiators by 2025[1].  While speakers at our Connect Forum acknowledged the challenges of transitioning to digital operating ecosystems, there was a strong sense of excitement and optimism about the innovations that can be delivered through distributed ledger technology, particularly the tokenisation of assets.

As Ross Fox, our Managing Director, Head of APAC, said in his opening address, Calastone has always believed that digitalisation is the inevitable path that our industry would go down. New forms of digital technology are key to achieving scalability, flexibility of technical change, and the ability to integrate and share data, enabling the administration of digital only products, so they require little to no human intervention.

Building these capabilities is no longer a consideration for ‘someday’. Rather they are top priorities for firms, brought forward by the realities of COVID-induced hybrid working and the pace at which distribution channels and models are transforming. The fundamental consideration has shifted from seeking efficiencies and reducing risk to building technology capabilities in order to keep pace and not be left behind in a fast-moving digital world.

A fireside discussion between David Mackaway, Chief Operating Officer at Challenger and Justin Christopher, Director, Business Development, Asia Pacific at Calastone captured this ‘inflection point’, identifying major changes to how funds will be packaged, administered and delivered, within the next five years.

Tokenisation will unlock new assets and delivery options

There are limitations with the way managed funds are currently structured. Fund managers have to share the tax outcomes among all the unit holders. Customisation or tailoring of individual holdings isn’t possible. This goes some way to explaining the rise of separately managed accounts (SMAs) that allow an investor to have more direct ownership of the underlying securities and tailor the investment holdings.

Tokenisation of assets enabled through distributed ledger technology overcomes these impediments and more, by enabling greater granularity of strategies and allowing mutual investment models to integrate assets that have typically been the domain of private investing.  These include syndicated loans and assets such as wind farms, buildings, motorways, art and collectables etc, which don’t fit with standard pooled product structures. Given their ability to generate long term income benefits suitable for retirement products, private securities are certainly ripe for tokenisation using distributed ledger technology.

Further, while tokenisation of a fund does not change the way assets are valued, the costs associated with maintaining investor registers, where there is secondary market trading, should be reduced where ownership is represented using a token on a distributed ledger.

Mackaway summed up this potential, “Ledger style technology will allow us to streamline how we offer assets, and hopefully drive costs down. One of the big benefits of ledger technology is that you can split the assets to an infinite level, so that investors own specific underlying securities in a fund, not just a unit in a unit trust.

He also cautioned that there’s still quite a journey to go from a regulatory perspective to ensure customers and assets are protected, and everyone is comfortable with the new direction.

The whole industry is pivoting to D2C

In our recent Future of Distribution Survey, almost two thirds of Australian asset managers said they’re going to start to grow direct-to-consumer (D2C) distribution models, with this being a specific focus for new wealth management arms.  While reflective of changing investor preferences to consume financial services directly, as they do other services, the overwhelming catalyst for this shift is the way in which the entire industry has pivoted this way, especially post the Royal Commission which brought significant change to the adviser segment.

Speakers emphasised that D2C won’t ever replace advice-led distribution, yet alternative routes are needed to fulfil the needs of investors given the limited number of advisers available. Asset managers need to adopt technology to change how they package and deliver products to investors directly, as well as make the jobs of advisers easier.

The future for managed funds industry is accelerating

While firms are embracing enterprise wide automation at an accelerated rate, it is sobering to note McKinsey research, which shows that 70% of large corporate transformation projects generally fail.  This has no doubt contributed to industry standard practice where new projects typically require manual ‘workarounds’, which can remain baked into processes as teams turn to the next project and priority. An ecosystem of systems is likely to be the solution as target operating models and service delivery approaches evolve, with distributed ledger technology bringing much needed standardisation to connect the parts.

The potential for using distributed ledger technology grows daily, further evidenced by our recent agreement with Microsoft which enables both of our firms to collaborate on cloud and distributed ledger technology using Microsoft Azure’s Confidential Consortium Framework (CCF), to create market efficiencies across the global funds management industry.  Azure’s CCF is already helping to power Calastone’s DMI (Distributed Market Infrastructure) Fund Services, a suite of solutions that provide fund managers, administrators and distributors a fully digital operating model, using cloud and distributed ledger technology.  Some of our new services include insight dashboards that show cash positions and unit inflows and outflows in real time, end-to-end order management in real time and net asset values in real time. These developments will allow fund managers to make decisions faster and create new investment options as well as enabling fund platforms, administrators and the entire value chain to benefit from faster, more efficient and effective processing.

Technology and data have always played a crucial role in financial services, yet the big difference today is what that technology enables.  2022 and beyond are going to be very exciting years for the industry.

[1] The Future of Asset Management

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