Taimur Hyat, chief operating officer 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 to one of the authors and innovators behind the firm’s megatrends research and reports, cryptocurrencies appear a little different than most opportunities. Hyat is emphatic: “We are quite bearish on cryptocurrencies as having any evidence of being a useful or suitable part of an institutional portfolio.”
The COO rattles off a number of reasons to support his view. “Cryptocurrencies fail all the tests of a currency. Crypto also fails to meet, at least at the moment and in the near future, many of the key characteristics of what institutional investors are looking for. They are 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 equity markets and risk-on 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 gold still plays that role.” Cryptocurrencies, on the other hand, have yet to demonstrate that ability.
On Wednesday, PGIM, the $1.5 trillion asset management business of Prudential Financial, published its most recent Megatrends report, entitled, “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 probably not going anywhere anytime soon. “It goes without saying that bitcoin and many other cryptocurrencies have delivered awe-inspiring returns over the last decade — albeit with frequent and substantial drawdowns — and this speculative momentum could continue for some time.”
Even if Hyat is bearish about the currencies, he’s not writing off the larger ecosystem, including the metaverse, tokenization, and unique applications of blockchain and smart contracts for clearing and settlement, payments, logistics, and the supply chain. Private blockchains and smart contracts could be particularly useful for originating and trading assets and could help settle over-the-counter derivative and other customized transactions.
Tokenization, a process that could be used to securitize investments in areas like commercial real estate, is also potentially groundbreaking and could help retail investors get into these still institutional sectors for the first time, argues PGIM.
Assets such as precious metals, artwork, or infrastructure could be tokenized, which could then reduce costs and increase liquidity and the transparency of prices. As PGIM explained in the report, institutional investors are now used to playing the role of influencers on real estate fund strategies. But in a big change, “a more fractionalized ownership model could potentially reduce the influence of anchor investors in the covenants or terms for large real estate transactions that could now be broadly syndicated with smaller institutional, high-net-worth, and retail investors.”
PGIM’s own real assets teams are keeping an eye on tokenization, because they believe that the democratization trend could ultimately change some of the fundamentals of investing in these sectors, noted Hyat in the interview with Institutional Investor. “There’s quite a lot of regulatory, tax, and sell side and custodial infrastructure that needs to be built before this is mainstreamed into the institutional space. But this is absolutely a space where innovation is happening now,” he added.
Although PGIM believes it’s too early for major investments in the metaverse, Hyat said that Millennials and members of Gen Z are spending a lot of time in the virtual world, and investors shouldn’t ignore it. That, however, may require a little experimentation on the part of institutions.
“Cryptocurrencies and digital tokens are the currency in the metaverse,” wrote the authors of the megatrends report. “This is a world where crypto natives have chosen to adopt 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 broad cryptocurrency and digital token landscape will need to monitor the transaction, payment and currency systems being developed for and in the metaverse.”