Envisioning a digital future
At abrdn, we have a clear vision of a digital future. We recognise that new technologies will change the way we invest, revolutionising the investment landscape and make investing accessible to a broader audience. At the core of this transformation is Distributed Ledger Technology (DLT), an effective method of recording ownership details in a decentralised computer network.
We believe that, in the next decade, nearly all investments could come to be represented as digital assets using DLT. This advancement could bring numerous advantages, including faster, safer, and more cost-effective ‘on chain’ trading and settlement, enhanced efficiency in private markets, and the fragmentation of assets into less expensive units.
Nearly a century ago, the first modern, open-ended mutual fund was invented, revolutionising the world of finance. It made investing in a variety of securities simple – benefiting both individuals and institutions.
Since then, however, not a great deal has changed in the structure of the humble mutual fund. It has undergone fairly limited innovation, despite greater governance and oversight, more processes and paperwork. This has meant increased operational friction and costs to the end investor. Furthermore, while the range of investment opportunities is vastly larger today, there’s a significant difference in the opportunities that are available to the largest investors and those available to the smallest.
Distributed ledger technology (DLT) has the potential to change things.
Operating Models
The typical fund operating model relies on multiple third-party service providers, leading to separate private ledgers and increased operational friction. Distributed Ledger Technology (DLT) has the potential to streamline this process by consolidating data on a single ledger and using smart contracts to automate reconciliation and reporting tasks. This would reduce data processing time and lower operating expenses for the fund and its investors.
Tokenisation
Tokenisation, another application of DLT, can help close the gap between investment opportunities available to large and small investors. By representing assets as tokens on a distributed ledger, they can be easily fractionalised and traded on a regulated digital securities exchange, democratising the investment landscape. This process applies to various asset types, including niche alternative assets like wine and art.
How tokenisation could benefit investors
The benefits of tokenisation extend to large investors as well, providing increased liquidity and the potential for additional value through asset fractionalisation.
In this way, we can take a US$100 million private equity asset, tokenise it, and turn it into 100 million US$1 tokens. These tokens can then be listed on a regulated digital securities exchange to trade on a secondary market. By doing this, the minimum investment is now affordable to the smallest investor, while the secondary market creates liquidity.
This process can be replicated with fund vehicles, bonds, equities, and any other asset that can be held in custody, including niche alternative assets, such as wine and art. Thus, the investment landscape becomes truly democratised – giving the smallest investors the same opportunities as the largest.
Additionally, the largest investors who are the original asset owners, get the benefit of increased liquidity in their portfolios, allowing them to think differently about the liquidity profile of their asset mix. They also have the potential to create additional value through the fractionalisation of their assets, which are likely to come at a premium.
Investing in the future, today
To prepare for the future, we’re focusing on the following three key areas:
- Developing investment products that offer exposure to future technologies.
- Utilising these new technologies to enhance investor access to our existing products.
- Making strategic investments in the new DLT-powered market infrastructure.
Our digital conviction
As a forward-thinking investment company, we are committed to redefining the industry’s standards. For example:
- Archax – We’re the largest external shareholder in the UK’s first regulated digital securities exchange. Archax allows institutional investors to access blockchain-based digital assets and acts as a bridge to the traditional capital . Building on our investment in Archax, great progress has been made towards creating tokenised representations of our funds. This work leverages Archax’s recently announced Tokenisation Engine and represents the first step towards a number of traditional, real world tokenisation projects that we are working on together.
- Hedera – We’re the first asset manager to join the governing council of this cutting-edge DLT firm. Hedera pioneer enterprise-grade technology, enabling the seamless migration of traditional investments onto the DLT. Hedera’s technology is playing an important role in our tokenisation and digitisation journey. As such, we felt it was important to have a governance role in the business and our on-premises node is now live, helping to operate the network.
Duncan Moir, Senior Investment Manager, comments on our progress in this area: “Blockchain technologies are inevitably going to form a big part of the future of financial markets. The progress we’ve made so far in this area throughout 2023 will set us in good stead to develop our capabilities in this area for years to come."
Venturing into healthcare and biotech
In addition to our focus on new technologies in the Alternatives space, we announced our intention to establish abrdn as a centre of excellence for healthcare and biotech investing with the acquisition of Tekla Capital Management LCC’s (Tekla) healthcare fund management capabilities.
As part of this venture, Tekla’s specialist investment team will be joining abrdn, bringing with them a remarkable track record of over 20 years in the healthcare sector. Their expertise will bolster our efforts as we expand our offering in this area.
This pivotal strategic step reinforces our commitment to specialist active management and thematic sectors, grounded in long-term megatrends.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.