Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Custodians get ready for digital assets
While many professional investors remain sceptical about the investability of digital currencies such as bitcoin – fool’s gold? – the asset servicing world is taking no chances, according to a study by Citibank and Global Custodian.
The big global custodian and main business media title for asset servicing have published a report ….. download PDF …… ‘Is the Securities Services Industry Ready for Digital Assets?’ ….. which surveyed 220 major traditional players in asset servicing who provided validated responses to some detailed questions covering a range of digitalised assets, not just currencies, considered likely to grow in usage in coming years. The common theme with the assets was their use of distributed ledger technology.
The respondents included: commercial banks, such as custodians; broker dealers and investment banks; fund managers; market infrastructure providers, such as exchanges and data providers; and other large participants.
The report says: “The results show that the financial services industry recognises the potential of digital assets to become a key technology supporting the asset lifecycle and, in the years to come, capture a significant portion of the activity in the world of tradeable assets. Many individual firms, however, have yet to refine their own strategies for engagement.”
In terms of their general attitudes to digital assets, 63 per cent said: “Digital assets are the future. We are developing a strategy to invest in or support these assets.” Another 28 per cent said: “Digital assets are the future. We have a clear strategy to invest in or support these assets.” Only 6 per cent said: “Digital assets will remain a niche interest – primarily for individual rather than institutional – investors.” And just 2 per cent said: “We don’t think digital assets will play a role in the future.”
The report says: “When it comes to mainstream institutional engagement with digital assets, the survey results reinforce the encouraging trends we are seeing both in our own industry observations and as part of our conversations with market participants and investors.
“There is, no doubt, increasing momentum in digital asset investment and in the technologies being developed to support it. We are excited to see how these trends will evolve over the next few years.”
The report notes that handling the safekeeping of, and records for, digital assets is similar to the same services which custodians already provide for a broad range of assets, including private capital and even collectibles.
But, with a word of warning, the survey indicates that there may be competition from fintechs when it comes to providing custody for digital assets. The survey found that while expertise in traditional custody was seen by just under a quarter of respondents as the most important consideration in appointing an external custodian for digital assets, 47 per cent of participants cited experience in digital assets and networks as the key factor.
