Now is not the time for Crypto, multi-asset managers warn

Quite apart from the high-profile scandal of FTX and its collapse, which sent shockwaves around the world, British regulators and policy makers have been cracking down on and debating over crypto in the UK.

Early in December, the High Court in London ordered a number of crypto exchanges to reveal the personal data of some of their users after a fraud was uncovered. 

Later on in December, the FCA announced it had cracked down on misleading promotions after 164 cases fall foul of rules - many of which related to finfluencers promoting crypto assets. 

The volatility is so unstable it is difficult to mix with other traditional assets like bonds and equities.Guillaume Paillat, Aviva Investors

And while many financial advisers currently do not think portfolios should ever contain crypto assets, the day may come when crypto assets become regulated and therefore have a place in well-diversified investment portfolios.

But what do multi-asset managers think? In their quest to provide well-diversified portfolios, alternative asset classes such as infrastructure or real estate, can and do play a part in the quest for diverse income streams. 

Could crypto become an 'alternative' asset class? 

What the managers say

FTAdviser asked several multi-asset managers for their thoughts on incorporating crypto within portfolios. 

Ian Jensen-Humphreys, portfolio manager at Quilter Investors says it would be "unlikely". 

He explains: "As fundamental investors, it is unlikely that crypto assets will become part of the multi-asset arsenal, particularly as a reliable or thorough way to value crypto at large is yet to be found.

"The technology behind crypto, however, is more likely to make its way indirectly into our funds – be that through software integration or other exposures."

Similarly, Guillaume Paillat, multi-asset fund manager at Aviva Investors, believes it will be a long time before such assets can be properly regulated and a valuation standard can be assessed.

it is unlikely that crypto assets will become part of the multi-asset arsenal.Ian Jensen-Humphreys, Quilter Investors

Paillat says: "They are lightly regulated and they are hard to value, offering no direct interest or dividend - so not ideal, especially against a backdrop of rising interest rates. 

"Also, the volatility is so unstable it is difficult to mix with other traditional assets like bonds and equities."

He adds: "It’s difficult to develop a robust investment process for an asset that is so driven by speculation. The potential for large losses based on little new information is striking.

"However, with more countries supporting crypto payments, a more regulated 'official' series of digital currencies could be the way of the future. "

Exchange-traded funds

Some crypto-based exchange-traded funds have been given the green light by regulators such as the Securities and Exchange Commission. These could offer a way for investors to have a form of synthetic exposure to crypto assets without being invested in them directly. 

And, as ETFs are a regulated investment product, with greater liquidity, this should offer some comfort to investors who are still wary of getting into crypto directly. 

However, not even crypto-based ETFs have made the cut into most multi-asset portfolios, yet, although some manager believe one should "never say never".

Jean-Yves Chereau, partner at J Stern & Co, says even these products are not clear, simple and transparent enough to find a place.

He explains: "One of the key pillars of J.Stern & Co's investment philosophy is the delivery to clients of a clear, simple, and transparent investment process, and opportunities.

As crypto assets mature they may become more investible, potentially as small positions within alternative allocations.Seager-Scott

"So far, we have struggled to find any of those in the crypto asset space. Whether this could change over time is a question for the future."

Similarly, Ben Seager-Scott, head of multi-asset funds for Evelyn Partners, says crypto assets are not "realistically investible" yet - but could become so in the future. 

According to Seager-Scott: "I would be wary about saying ‘never’ for any asset class, and famously JP Morgan’s CEO had to row back some rather acerbic comments about crypto currencies.

"That said, their current state doesn’t look anywhere near realistically investible for most multi-asset funds, with little fundamental basis for investment or much confidence in the investment characteristics they exhibit."

Seager-Scott adds: "However, as crypto assets mature they may become more investible, potentially as small positions within alternative allocations."

However, he says this will be a long time coming - especially after all the furore at the end of 2022.

Certainly advisers would agree that now is not the time to invest in crypto - and unless there can be proper regulation and standardisation of ways to value and assess crypto assets soon, the time to add such assets into portfolios will not come for a long time yet. 

simoney.kyriakou@ft.com