Five of the UK’s largest asset managers have reportedly joined forces to see if blockchain technology can reduce trading costs. The Financial Times claims that the “secret project” is in its early stages, but already involves fintech companies, start-up technology businesses, and one of the big four audit firms, KPMG.
The main companies involved have a combined total of more than £1 trillion under management. The largest participant is Schroders, with 37 offices in 27 different countries across Europe, the Americas, Asia and the Middle East.
“We manage £294.8 billion (€400.0 billion/US$446.5 billion) on behalf of institutional and retail investors, financial institutions and high net worth clients from around the world, invested in a broad range of active strategies across equities, fixed income, multi-asset, alternatives and real estate.”
Joining the multinational giant are Aberdeen Asset Management and Columbia Threadneedle Investments, who manage £290.5 billion (~US$428b) and £320 billion (~US$461b) respectively. Aviva Investors and Henderson Global Investors have also been in discussions, reports the FT. They manage a further combined total of £327.5 billion (~US$472b).
While these numbers seem almost incomprehensibly large, a report by the Boston Consulting Group (BCG) shows that global total for Assets Under Management (AUM) reached US$74 trillion in 2014, which is almost the same as global GDP of US$77.8 trillion, according to the World Bank. In an independent report, PriceWaterhouseCoopers (PwC) predicts that global AUM will exceed $100 trillion by 2020.
Asset management companies typically pool funds from retail and institutional investors. Their ability to trade in large blocks of securities reduces costs substantially. Investors also benefit from diversified risk.
“Asset managers develop cost-efficient investment fund products and tailor-made solutions to meet particular investment goals and constraints. They provide capital to help SME’s, corporates, banks, governments and other institutions meet their short and long term funding needs.”
- European Fund and Asset Management Association
These multi billion dollar management companies can also provide higher liquidity to their clients, even when they are investing in illiquid securities. This new group of managers will explore several blockchain applications to speed up the transfer of illiquid securities directly between funds, which can currently take several days.
This project is the first time fund managers have come together to explore the use of blockchain technology, and while they play a key role in capital market infrastructures, they are among the last of the financial giants to enter the blockchain race.
Banks have been heavily studying the technology for quite some time. 42 banks joined the R3 CEV consortium last year, in an effort to design and develop commercial products and financial-grade blockchain solutions. Several banks are also working on their own blockchain initiatives, including Barclays, UBS, and Deutsche Bank.
The US investment banking giant, JPMorgan Chase, partnered with Blythe Masters' Digital Asset Holdings recently. The team hopes to launch a trial project using blockchain technology to address liquidity mismatches in some of JPMorgan's loan funds.
Over in Japan, a leading provider of consulting services and system solutions, Nomura Research Institute (NRI), is collaborating with SBI Sumishin Net Bank Ltd. The aim is to develop a proof of concept for applying blockchain technology to banking infrastructure. This announcement came after NRI had already begun studying the use of blockchain technology in the securities industry.
Tackling the technology from a different angle, Bank of America has reportedly drafted 20 blockchain-related patents. According to the US Patents and Trademark Office, the bank has already filed 11 various cryptocurrency applications. Goldman Sachs has also filed a patent application, “Cryptographic Currency For Securities Settlement.”
The French multinational insurance firm, AXA, recently outlined potential applications for the technology. Smart contracts, micro transactions, and settlements were all mentioned in a company announcement. The group's venture capital arm led the US$55 million funding round for Blockstream, because of “its future impact on insurance and asset management.”
“Blockchain technology has the potential to transform existing industry standards across sectors including insurance and asset-management. Distributed ledger technology has the capacity to simplify and bring transparency to the transactional model of insurance while lowering operational costs.”
- AXA Strategic Ventures
Exchanges and post-trade service companies are also ahead of asset management companies. While the Nasdaq group is already using the blockchain to issue securities for their private market, the London Stock Exchange is participating in the “Post Trade Distributed Ledger Working Group.” The collaborative effort include the large clearing house Euroclear.
Both Euroclear and its US counterpart, the Depository Trust & Clearing Corporation (DTCC), recently released reports urging the industry to start using blockchain technology to improve capital market infrastructure.
An working paper from management consulting firm, McKinsey, on Corporate & Investment Banking, explained the benefits of using blockchains in capital markets, including eliminating a number of middle and back office processes.
“Asset management companies should enjoy the same operational benefits as dealers and intermediaries, with the caveat that their participation may correspond to a leap forward in the impact of the technology, as operational steps such as reconciliation and asset movements are suddenly simplified (with corresponding impact on the traditional providers of these services).”
- McKinsey & Company
It may take some time for asset managers to develop solutions based on blockchain technology. An independent report from PwC claims that by 2020 we will see the emergence of a new breed of global managers, “one that will have highly streamlined platforms, targeted solutions for the customer and a stronger and more trusted brand.”
The Financial Times reported that the world’s largest asset manager, BlackRock, with US$4.6 trillion under management is “monitoring developments in this area.” However, some of the world’s largest asset managers, including Pimco and JPMorgan Asset Management, are “not looking closely at how blockchain can be applied to the fund industry.”