Institutional investing is on the cusp of a structural reset as advances in blockchain-based technologies rewire the market plumbing that underpins asset ownership.
This next generation of infrastructure will operate continuously with near-instant settlement across traditional and newly tokenized assets, according to Franklin Templeton executive vice president and head of innovation Sandy Kaul.
“By 2030, every market and every asset settles instantly,” she told the Top1000Funds Fiduciary Investors Symposium at Stanford University, adding that portfolios will become highly customised “portfolios of one” tailored to each institution’s goals, liabilities and cashflow needs.
Kaul pointed to the recent passing of the US GENIUS Act, which marked the United States’ first major legislative step towards regulating stablecoins, as “the starting gun on a complete transformation” towards a wallet-based system that will replace today’s account-based system.
“This is a huge threat to banks – this stablecoin act – and this is just the beginning. But it has created a parallel economic system now and that parallel economic system is going to recreate everything that we have in the current system.
“There is going to be cash sweeps between stablecoins and tokenised money market funds so that you can manage your cash in the wallet-based system. There are going to be new investment options where I can now create liquidity around illiquid investments that I hold in my portfolio by tokenising interests and shares in them.”
Rest Super head of portfolio construction, external equities, Chris Drew, said the Australian pension fund held about 1 per cent of its global equity portfolio in US dollar denominated cash with a custodian.
“We’re looking at can we replace that custodial-held cash with a tokenised money market fund? And there’s our use case where we can get far superior yields. We get instant settlement and we get the added benefits of the intraday yield that you get… we said, ‘here’s a problem to solve. Let’s go and look at a number of ways we can do that’. That led us to tokenisation.”
Kaul said the technology underpinning its tokenised money market fund allowed investors to receive a proportionate share of interest for the exact time they were invested.
“If you owned a tokenised money market fund for three hours of the five hour or the eight hour trading session, you will get that proportionate share of the day’s interest, and we are paying that interest out every single calendar day of the year.”
But such a radical change to the market’s underlying infrastructure also challenges existing governance approaches.
CFA Institute CEO and president Marg Franklin said the tokenisation of assets will change their characteristics and also drive returns. Many asset owners will need to consider these interconnections, particularly on illiquid assets such as infrastructure.
“You have to determine, is your valuation methodology accurate, what does it look like, and then how does that impact your performance measurement and what you’re reporting to beneficiaries or to your board?
“The responsibility for due diligence, and the sort of accuracy of your due diligence is going to increase, and the complexity of that due diligence is going to increase.”
Drew said tokenising real world assets would create a new operating environment – one that Australian regulation had yet to catch up to.
“You’ve got to completely re-imagine how you think about your investment structure and that’s what we’re grappling with.”
Separately, Drew said the fund was also now increasingly using AI as part of its investment decision making process including to more accurately and quickly distil information and action items from manager meetings; to perform deep research and identify market thematics; as well as data analytics.
For example, AI can predict index rebalances or produce insights about shifting correlations in near real-time.
“Everyone talks about the Mag Seven. We would argue there is no Mag Seven… at some point in time, there’s a Mag Three, at some point in time, there’s a Mag Five. These correlations move around through time, and so that’s information for us as well – how exposed you want to be to these correlated groups of stocks.”
