Taimur Hyat, COO of PGIM, rarely speaks in black and white terms when it comes to his assessment of investment opportunities for pensions, endowments and other institutions.
But for one of the authors and innovators behind research and reporting on corporate megatrends, cryptocurrencies seem a little different than most opportunities. Hyat is adamant, “We’re quite bearish on cryptocurrencies as having evidence of being a useful or appropriate part of an institutional portfolio.”
The COO advances a number of reasons in support of its view. “Cryptocurrencies fail all the tests of a currency. Crypto also fails, at least for now and in the near future, to many of the key characteristics that institutional investors are looking for. not an effective store of value, they don’t have stable correlations with other asset classes, and to the extent that they are correlated, they are actually not a diversifier, but quite closely correlated to markets stock markets and risk regimes.” Addressing crypto’s supposed ability to act as a safe-haven asset, Hyat added, “Gold still has intrinsic value, and the recent tragic events in Ukraine have demonstrated how the gold still plays this role.” Cryptocurrencies, on the other hand, have yet to demonstrate this ability.
On Wednesday, PGIM, the $1.5 trillion asset management firm of Prudential Financial, released its latest Megatrends report, titled “Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?
Even though PGIM found little empirical evidence that crypto is appropriate for institutional portfolios, the report acknowledged that the asset class is unlikely to go anywhere anytime soon. “It goes without saying that bitcoin and many other cryptocurrencies have generated impressive returns over the past decade – albeit with frequent and substantial drawdowns – and this speculative momentum may continue for some time.”
Even though Hyat is bearish about currencies, it doesn’t negate the broader ecosystem, including the metaverse, tokenization, and unique blockchain and smart-contract applications for clearing and settlement, payments, logistics and supply chain. Private blockchains and smart contracts could be particularly useful for asset origination and trading and could help settle OTC derivatives and other personalized transactions.
Tokenization, a process that could be used to securitize investments in areas such as commercial real estate, is also potentially revolutionary and could help retail investors break into these still institutional sectors for the first time, PGIM claims.
Assets such as precious metals, works of art or infrastructure could be tokenized, which could then reduce costs and increase price liquidity and transparency. As PGIM explains in the report, institutional investors are now used to playing the role of influencers on the strategies of real estate funds. But in a big shift, “a more fractional ownership model could potentially reduce the influence of anchor investors over the terms or conditions of large real estate deals that could now be widely syndicated with smaller institutional, high net worth and retail investors. ”
PGIM’s own real assets teams are monitoring tokenization, as they believe the democratization trend could ultimately change some of the fundamentals of investing in these sectors, Hyat noted in the interview with Institutional investor. “There’s a lot of regulatory, tax, sales and custody infrastructure that needs to be built before this gets integrated into the institutional space. But it is absolutely a space where innovation is happening now,” he added.
Although PGIM thinks it’s too early for major investments in the metaverse, Hyat said Millennials and Gen Zers spend a lot of time in the virtual world and investors shouldn’t ignore it. . However, this may require a bit of experimentation on the part of institutions.
“Cryptocurrencies and digital tokens are the currency of the metaverse,” the authors of the megatrends report wrote. “It’s a world where crypto natives have chosen to embrace digital currencies and tokens as the sole medium of exchange and unit of account to trade NFTs, buy digital assets in a multiplayer game, or attend a virtual concert Investors looking to understand the future direction of the vast landscape of cryptocurrencies and digital tokens will need to monitor the transaction, payment, and currency systems being developed for and within the metaverse.