Technology has been transforming the investment business for my entire career. As an equities trader in the 1990s I saw the rise of electronic trading and messaging in place of traditional voice trading – an early lesson in the power of digitalisation and the importance of moving data with speed and security.
When I joined Calastone in 2010, funds had still not caught up. It was an industry that still ran on paper, pen and fax machine. As a business we have made it our mission to change that: using technology to automate processes and target the friction that eats into profit margins and investment returns.
We started by addressing one fundamental problem, the prevalence of manual processes in order routing and settlement. The solution, a network to connect participants across the fund value chain, allowing them to transact seamlessly, has been the foundation to tackle many more inefficiencies affecting funds.
Today that network connects over 4,000 organisations spanning 55 markets, by far the largest in the industry. The same lesson has been proven again: when counterparties have the infrastructure to move data quickly and reliably, you can expect that efficiency gains and cost savings – the bedrock of alpha – will follow.
From its starting point in order routing, the Calastone network has continued to expand in scope and scale. By enabling participants to harness automated processes and real-time data, we help them to solve a range of fund administration, distribution and management issues – client fund transfers, share class conversions, dividend information and reporting and reconciliation among them.
Our consistent focus has been to identify processes that impede the smooth running of funds, and use the power of our network to drive improvement. Along the way we have continued to invest, ensuring we can facilitate access to the latest technologies, and embracing a microservice architecture that increases the speed at which we can develop new solutions. Today, our Distributed Market Infrastructure (DMI) allows fund providers to harness cloud and distributed ledger technology (DLT), meaning sharing data can be done more dynamically and securely than ever before, enabled through our partnership with Microsoft.
As our business has evolved and diversified, the industry has been changing in parallel. The mutual fund, which next year will mark its centenary, has seen its growth slow, with Schroders CEO Peter Harrison suggesting we could reach ‘peak mutual fund’. New money is largely diverting to ETFs, which saw AUM increase at a rate of 16% per annum between 2016-22 against 5% for mutual funds.
We have aligned with market demand, bringing the same principles we introduced to the mutual fund industry first to money market funds and latterly ETFs, now nearing their 30th anniversary. While these are renowned as an efficient, often low-cost vehicle, some familiar inefficiencies remained. We recently announced our collaboration with HSBC on our new ETF administration platform, addressing operational shortcomings in the primary market, which historically involved clunky systems for the order management process between authorised participants, issuers and third parties. It has been a reminder that legacy issues continue to lurk around most corners of the industry, and why using technology to boost performance is such an imperative.
Towards tokenisation – a truly digital future
Calastone has been driving change in the funds market since it was launched 15 years ago. And we are continuing to push into new territory, now preparing for what may be the most important technology transformation yet – to digitalise not just the systems and processes that underpin an investment, but the assets themselves.
This is tokenisation, the process of rendering assets as digital tokens, which can be traded and held on a distributed ledger (blockchain). The conversion of an asset into tokens has multiple benefits: it improves transparency, allows for instant settlement and facilitates fractional ownership, allowing more investors to access previously boutique asset classes.
The development of tokenised funds, which we have already started to see in the last 12 months, will represent many transformations in one. For the supply side it will be a step change in efficiency, with the underlying DLT infrastructure providing a secure environment for providers to share data and execute agreements – the basis for seamless and swift product development. While for consumers it should lower costs and also increase choice, since any asset can be tokenised and distributed as fractional shares.
Using DLT, a tokenised fund can be built at unprecedented speed, tailored to the individual investor, and digitalised end-to-end. It will allow investors to benefit from the accessible and affordable investing that funds and ETFs have long provided, with the greater level of customisation and choice that many are now seeking. The upshot should be increased personalisation and improved access to different asset classes, all delivered at scale to a deeper pool of investors.
At Calastone, we have always believed that the future of funds is digital. Tokenisation represents the most complete manifestation of this vision: one in which funds are not just distributed through digital channels, and orders routed through automated systems, but the product itself becomes digitised, with all the associated benefits of speed, efficiency and flexibility. With the first mutual fund being introduced in 1924, followed by the first ETF in 1993, we believe that tokenisation is the next stage of transformation for the asset management industry.
We have been working for some time to build the foundations of this future, through pilot programmes to explore tokenised investment vehicles with fund managers including Schroders. It is an exciting new development that stems from the same philosophy that has always motivated us: to equip fund managers with the tools they need to develop and deliver the best possible products – efficient, low cost and customer-centric.
In the process we believe we will help to facilitate the next major evolution of the funds market. The investment business has always thrived on finding new ways to allow people to access markets at lower cost and with greater choice. Tokenisation can deliver a generational shift towards this goal.
Having spent more than 30 years in the industry, I realise that the tools change but the moral remains the same: when technology is used well, you reduce friction, lower costs and improve customer experience. Providers have more capacity to innovate as tasks that previously occupied them are automated, and investors reap the dividend of greater affordability and choice. As tokenisation starts to become a reality, we should all see this virtuous circle start to accelerate. After 15 years of evolution, the funds industry stands on the precipice of another exciting era of growth and change.