In today’s difficult climate of high inflation and negative interest rates, treasurers should look beyond traditional liquidity strategies and consider the advantages of tokenised funds and exchange traded funds (ETFs), writes Ed Lopez of Calastone
Leaving company money sitting in a bank account puts it at risk and means its value erodes by the minute, yet treasurers can’t afford to tie up corporate wealth in inflation-proof, longer-term investments either. In such uncertain times, a company needs liquidity.
The best answer, as discussed in a recent webinar with treasury, finance and risk consultant Patrick Kunz and Natacha Blackman, fixed income product strategist for iShares ETFs at BlackRock, is to take a middle road. Treasurers need a diverse portfolio of liquid investments that generate a return without restricting cash flow. In this unstable climate, they need to be taking advantage of tokenised funds and consider the benefits of exchange traded funds (ETFs).
What are the advantages of tokenised funds?
Treasurers looking for a wider range of cost-efficient investment options to increase liquidity should think about tokenised funds.
Converting assets into tokens creates a digital record that can be freely traded using distributed ledger technology (DLT) and removes the need for traditional intermediaries such as a fund administrator or broker. This doesn’t just streamline processes, but keeps data about the fund secure and provides the potential for personalisation by combining tokens to create bespoke funds.
A huge range of assets (and blended assets) can be tokenised, including equity, debt, derivatives, ETFs, property, commodities, precious metals and more[1]. Even intellectual property rights can be securely tokenised and slotted into a blockchain[2].
Cost-efficiency
Asset managers and fund managers with the digital technology in place to create and distribute tokens can remove the burden of legacy processes and costly intermediaries, which makes tokenised funds easier and cheaper to manage. This places them in a better position to offer lower-cost funds to corporate investors.
Extraordinary personalisation or “bespoke-ability”
Tokens from different underlying assets can be mixed effortlessly, with different asset classes being mixed in a single token. Patrick Kunz loves the concept: “It’s the future, making it easier to invest.” With this comes great potential for bespoke investments that allow an individual investor to focus on what matters to them – investments tailored to ESG goals, for example.
Real-time access
With DLT, relevant parties, including advisers, network operators, treasurers, transfer agents, custodians, accountants, depositaries and more, have real-time access to all the information they need[3].
Trusted technology
Tokenised funds use DLT to secure sensitive fund data, but they are not to be confused with crypto or bitcoin. A trusted technology base, with a focus on security, privacy and scalability, is key to the delivery of tokenisation and this is the focus of Calastone’s partnership with Microsoft Azure.
Although interest in and uptake of tokenised funds is currently liveliest with retail investors, corporates and institutions are not far behind. Core treasury systems are not necessarily formatted to trade, book and account for tokens, but with only a few small technological changes, they could easily be positioned to allow treasurers to take advantage of tokenised funds.
Why consider ETFs?
ETFs are pooled funds that track an index, which – like stocks – can be traded intraday (unlike mutual funds, which price only once a day). They offer a remarkably cost-efficient way to diversify corporate portfolios while retaining liquidity and have a higher return potential than typical liquid assets.
As a corporate asset class, ETFs are still very under-used, but if treasurers are interested in preserving the value of their cash, they could be missing a trick. More broadly, according to Eleanor Hill, TMI editor and the webinar host, research from TMI and Barclays suggests that corporate investment in ETFs is starting to tick up, from around 6% in 2020 and 7% in 2021.
Increased returns
Low yields and high fees are forcing treasurers to look at alternatives to conventional short-term investment portfolios. BlackRock’s Natacha Blackman believes that while ETFs could be useful in supporting treasury’s search for yield, they are unlikely to be used within daily operating or even reserve cash buckets, she comments. Instead, “we see ETFs being held in a strategic bucket, where there’s an investment horizon of one year or more”.
Enhanced diversification
ETFs offer extensive choice, spanning almost any market or segment. For the cost of a single ETF share, treasurers can spread risk across upwards of 7,000[4] holdings. This helps mitigate risk and balance the overall portfolio, while avoiding over-exposure to a single bank or sector.
Ease of processing
Engaging with ETFs is much easier than it used to be. In the past, traditional core treasury solutions didn’t always have the capability to trade these types of instruments, or required manual intervention. Today, companies like Calastone can help connect existing technologies and automate the processing of ETFs as efficiently as any other traditional treasury investment fund.
Is 2022 the year for a new liquidity strategy?
The treasurer’s challenge continues to be balancing liquidity, security and yield, especially when events such as the credit crunch or the pandemic can turn markets suddenly.
But as technology removes friction from fund processing and creates new liquidity options, tokenisation and funds such as ETFs will soon become part of a treasurer’s short-term investment portfolio.
[1] Source: The Investment Association
[2] Source: The Investment Association
[3] Source: The Investment Association
[4] Source: Yahoo Finance
