While the passage of time may appear to have created more legitimacy for crypto currencies in the eyes of some investors, researchers who think critically about portfolio construction and financial products still don’t see a place for the likes of bitcoin in advised portfolios.
“We are seeing a lot of interest, but I can’t see any crypto being added to models or APL based on the preliminary work we have done,” says Lukasz de Pourbaix, Lonsec Investment Solution’s chief investment officer and executive director.
De Pourbaix is in charge of allocating the $1.3 billion invested in Lonsec’s managed account portfolios, around 10 per cent of which is invested in alternatives.
“If we were to allocate to it, it would be via the alternative asset class… there is still a long way to go in terms of understanding the asset, valuing the risk and a range of complexities,” he said.
After remaining relatively dormant since its first spike around three years ago, the leading cryptocurrency’s price has risen dramatically again.
“I don’t understand why bitcoin has the value it does – the value is there because people are prepared to pay it but for no other reason,” says Brad Matthews, founder of Brad Matthews Investment Strategies.
Bitcoin is commonly discussed in the portfolio context as a hedge against currency debasement, inflation protection or as an alternative to gold.
“What is driving the value outside what people are willing to pay? If you don’t understand that then you probably shouldn’t be advising on it,” Matthews noted.
Michael Furey from Delta Research shared a similar sentiment, adding that because of the lack of government backing and volatility there is a lack of trust which is required for it to be considered an appropriate form of currency.
“Even as a hedge to US Dollars or equities or as a diversifier, there still needs to be a positive return expectation which I currently can’t deduce,” Furey noted.
“It is purely a supply and demand asset which appears to be no better than Dutch tulips at this point in time,” he says.
What could move the needle in terms of legitimising crypto for inclusion in investor portfolios is investment from institutions such as established investment firms and superannuation funds, De Pourbaix noted.
There are currently a small handful of funds making their way to market, none of which have received a research rating, De Pourbaix says.
The researchers intimated that superannuation funds might have very small and inadvertent allocations to crypto currencies via an external alternative managers, but none were aware of superannuation funds devoting internal resources to the asset.
While the currency itself may not be considered a financial product, crypto funds promoting themselves to advisers via a managed investment scheme may need a specialist Australian Financial Services or other licensing authorisation depending on the features of the particular crypto asset, an ASIC spokesperson notes.