Since the onset of the pandemic, the term “digital transformation” has been used so often, and applied to so many fields of human endeavour, that it might be tempting to believe the process is already far advanced.
While digital tools have already transformed areas like retail, entertainment, and travel, as we approach the 100th anniversary of the first mutual fund, the investment industry in many ways remains little changed.
That cannot continue. The industry is facing unprecedented challenges: the burden of legacy technology, understanding a radically new type of investor, leveraging new innovations, keeping pace with big tech and challenger banks, and doing all this within more complex regulatory environments.
The state of progress and the development of tokenisation as a future collective investment model were among the topics under discussion at our recent Connect Forum Singapore.
While it’s broadly recognised that the industry sits at the crossroads of change, digitalisation is “very much in the early phase…we’re still a long way away from being mainstream,” noted Katherine Cox, head of strategic clients and product, asia, at Schroders.
“In many markets, it’s still manual, slow, highly fragmented, difficult to service, costly, and not value-centric at all,” said Edward Glyn, Calastone’s head of global markets.
In Asia-Pacific, implementation is patchy. Though much of that has to do with regulatory environments, much can be done (and is being done) to prepare for coming change.
After a couple of “stalled” years, panellists noted, the industry is now conducting “serious conversations” over key questions: how to implement digitalisation in a way that is timely, complete, risk-free, and meets the demands of a new breed of investor. The first step in answering those questions entails acknowledging that the process is not about plugging in new technology and flicking a switch.
At a very fundamental level, in other words, digital tools need to change not so much what the industry does, as how it does things.
Rene Michau, global head of digital assets, Standard Chartered said, “The underlying financial products for investors will be largely the same. However the innovative technology behind Distributed Ledger Technology (DLT) has the potential to improve financial product design and efficiency through organisational design and client services. From my perspective, digital transformation is much more about rethinking the business that we have, rethinking the role that we play in the financial ecosystem, and doing that in the context of delivering better outcomes for clients.”
As such, successful transformation will require industry-wide collaboration, said Justin Christopher, Calastone’s co-head of global market solutions.
As Christopher noted, “digital transformation is not just something that I can do, or build a team in haste to do, it’s got to be all of us around the table working to get the best outcome”.
A new era
Aside from delivering enormous boosts in efficiency and cost-effectiveness, a big part of that success – and a big test of the industry’s digital capabilities – will be how digitalisation trends dovetail with surging demand for ESG investment.
An effective ESG investment ecosystem will bear all the hallmarks of successful digitalisation: granularity of data, customisable portfolios, real-time management, faster settlement, and radically more efficient distribution.
“There are a lot of digital tools available to investment managers to figure out where and how they should invest, and to check their investments,” said Anshuman Asthana, head of post trade at Marketnode. “Where there is still a lot of space for digitalisation is having that continuous feedback between the investor and the investment.”
“What we’re seeing now…is technologies that allow us to link information together in such a way that visibility through complex structures to underlying assets,” Michau said. “If you can have an asset pool where the visibility is real-time, and any change in performance – whether that’s financial performance, or ESG – is reported in real-time, you’re really empowering the investors to make very proactive choices.”
Ultimately, technology is moving the industry towards an environment of customised and personalised portfolios at scale, enabling investors to “express their own preferences,” Cox said. This will, in all likelihood, mean an end to the era of packaged funds and canned reports.
“The new technology allows you to have an open architecture on a fund,” Asthana added. “So I don’t need to buy the whole fund; I can cherry-pick some assets and [create] a fund for myself.”
That era is already dawning. KKR & Co., for example, in September made one of its funds available to investors through a “tokenised feeder fund” on the Avalanche blockchain, Asthana said. This is potentially pointing towards a future in which mutual funds have had their day, and tokenisation becomes the norm.
According to a recent survey, 91% of responders ranked tokenisation highest as a future means of investment.
“Tokenisation is a once-in-a-generation opportunity for our whole industry to be radically better than it is today,” Glyn told the Connect Forum. “In a world of tokenisation, a fund would be digitally represented on a blockchain, or DLT, and the underlying assets would also digitally represented.
“This tokenised product would provide the same exposure but be issued and operated throughout a technical ecosystem where every player also has access, input, and oversight.”
For investors, this means more personalised low-cost investing, access to a bigger pool of assets – many of which were previously out of reach – and a user experience on par with the challenger banks and lifestyle apps. It also promises instant purchases, real-time investing, clear and fair pricing, and the transparency to see whether investments are aligned to principles.
For investment managers, it means radically enhancing the currently burdensome supply chain, simper fund issuance, improved transparency and analytics, and the prospect of greater alpha generation by shaving tens of basis points off management costs, Glyn said.
“Customers on the Calastone network can realise these new efficiencies and value immediately without having to build to a new standard or undertake costly re-platforming work,” Glyn told the Forum. “The approach we’ve taken allows fund managers and other providers to focus on building where it matters, creating innovative new products and ways of working with customers.”
Distribution remains a challenge, however. As Michau noted, “the big challenge is actually interoperability, and distribution in a way that’s meaningful across investor classes”.
The pathway to mass adoption requires meaningful collaboration between crypto-native players, industry players, and regulators. Within Asia, Singapore is showing the way forward with Project Guardian, a collaborative initiative between the country’s Monetary Authority and the financial industry to explore use cases for asset tokenisation.
“There’s been a lot of innovation [around tokenisation], but there’s also a lot of unrealised potential,” said Alan Lim, head of the fintech infrastructure office at the Monetary Authority of Singapore. “The objective of Project Guardian is not necessarily about decentralisation, or having some level of control. The goal is to drive towards more open and more interoperable markets.”
As regulators start to develop frameworks, and allow pilots in token-based investment vehicles, Calastone has been building the practical infrastructure to enable the move from funds to a new type of tokenised collective investment.
“Using our existing network as the bridge, we’re ready to make the dream of tokenised distributed ledger-based investing a reality,” Glyn said.