We held the last in the series of Linchpin webinars focusing on innovation on 20th January. We discussed innovative investment ideas in the new world of lockdowns and extreme fiscal and monetary stimulus. The subjects ranged a great deal wider than just bitcoin. Aoifinn Devitt moderated our panel of four:
Sorca Kelly-Scholte, Head of Pensions Solutions and Advisory, EMEA, J.P. Morgan Asset Management
Faisal Rafi, Head of Research, RisCura
Mark Steed, Chief Investment Officer, Arizona PSPRS Trust
Andrew van Biljon, Research Director, Ruffer LLP
It is clear that the future is not going to be the same as the past. The panel broadly concurred that the long-term environment is likely to be one of higher inflation, negative real interest rates and very likely much lower returns. For example, one panellist suggested just a 4% annualised return in the next decade from US equities, much lower than the past 40 years. The other major trends which focused the panel’s attention were the rise of China and the greening of the world, both accelerated by COVID.
The question was where then to invest, and answers came thick and fast. We spent some time on bitcoin and cryptocurrencies because they have been in the news so much. The obvious questions were based round whether they have any value and whether they will last. The panel made a clear distinction between bitcoin, a store of value, and some of the more sophisticated codes and protocols being developed.
Bitcoin is not tangible in the way gold is and cannot be worn, but it has some advantages over traditional wealth: it is not dependent on the behaviour of an institution or government and can be transferred across the world very quickly. The point was made that this could be used for criminal purposes too but the panel’s view was that the exchanges which trade it are increasingly regulated. Indeed, this could be seen as the seeds of the end: if it is regulated, is it any different from gold?
There were different views on its future. One panellist said that it was at a stage where there was still room for substantial take-up if it did become mainstream. On the other side, while it is the poster boy today for some, there are significant technical issues and it may be overtaken by more sophisticated protocols, perhaps issued by central or other banks. Digital currencies are already here and perhaps the big question is whether regulation will allow innovation.
We discussed China. It is now the second largest stockmarket (with 4000 companies) and bond market and, as one panellist said, combines emerging market enterprise with huge size; even companies in quite staid businesses can compound growth fast over multi-year periods. It was also noted that 25% of the global real estate market (investable) will be in Asia in coming years. The panel was clear that Asia was going to be at the core of the next 10 years, but the audience was more sceptical about how to invest in China, citing ESG, governance and even the rule of law.
We looked at some diversifying investments in the private markets. We discussed market illiquidity and for pension funds the need to have robust cashflow analysis: if you know there will be no unexpected need to generate cash you can be more relaxed about illiquidity.
Private markets are now just as deep and varied as public ones and should no longer all be branded under the one name of ‘alternatives’. The panel acknowledged the challenges of governance, complexity and cost remain as they fragment, but that of itself is sparking innovation.
Another view was that the drawbacks of complex investment could be reduced by simply gearing up a less risky one modestly. If the premium on private equity, for example, falls to 2-3%, but an investor needs that higher return, it may be easier to leverage a lower risk/lower return asset class than investing in a complex portfolio of alternatives. The real reason for investing in them was to gain exposure to areas you could not access in public markets.
This sparked a conversation about uncorrelated assets: soccer and e-games have much younger audiences than, say, NFL or baseball, and are less correlated with the economy. Bereavement assets, which a couple of the panel had invested in, are probably reverse correlated. But as one panellist said, innovation needs action and when looking at these innovative ideas it is important to track what is being done to keep stakeholders comfortable.
Perhaps the most interesting conversations were how technology and computerisation could change how we access some of these ideas. Technology is now behind all industries and venture cap portfolios should be much broader than just IT and healthcare. We touched on tokenisation and digitisation in particular and how cryptocurrencies might be used as ways of harvesting different return streams without the traditional ownership of the asset.
Throughout the discussion we returned to the theme of ESG as a driver of innovation. Bitcoin miners can site their factories to use surplus energy from hydro-electricity which would otherwise go to waste. The 2008 Olympics were a turning point on the environment for China, and the authorities rapidly shut down badly polluting companies and industries and replaced them with new ones. Companies soon realised that focusing on their environmental footprint was important to their survival. We touched on Jack Ma, and a panellist made a clear distinction between the production of tech goods and services and how the Chinese government used them. Investors should not be afraid to demand and expect high social and governance standards of Chinese companies.
In discussing innovation, we can almost guarantee that we will miss what with hindsight was the most important one. In 1979 the world wide web was hardly more than an idea. This was a rich hour of conversation dense with insights and ideas. Please feel free to contact us at Linchpin for more information.