Why AMP Super added bitcoin to its portfolio
AMP has dared to go where no super fund has gone, taking the plunge with a "modest allocation" to Bitcoin, even as other industry heavyweights stand resolute in their rejection of the digital asset.
Last week, AMP senior portfolio manager Steve Flegg made public that the fund had "took the plunge" into crypto, with its exposure to digital assets now accounting for 0.05% of its total assets under management - $57 billion.
Flegg says crypto had "become too big, and its potential was too great to continue to ignore," though he also acknowledges that its "risky, new, and not yet fully proven", which drew a cacophony of reactions.
He explained that the underlying fundamentals of their investment decision, one that had been "wrestled with" over the last two years, was in part based on a hypothesis that regular currencies or gold "only have value because people collectively agree to assign them value", and that there's evidence "people are ascribing value to cryptocurrencies in the same way".
The second part of the rationale is that Visa and Mastercard, two of the world's largest 20 companies, process payments, which is a "ridiculously huge market", and cryptocurrencies have a prospect of "capturing a substantial slice of this market".
Not only does owning crypto provide exposure to this potential future growth, but it also acts as a hedge for AMP's exposure to traditional payment companies, he says.
AMP chief investment officer Anna Shelley says the decision to allocate a "small and risk-controlled position" in digital assets through AMP's Dynamic Asset Allocation (DAA) program - which is designed to provide diversification and upside to members by investing in tradeable assets, including equity and bond futures, VIX futures, currencies, and traditional commodities like gold, copper, and oil - was done "following testing and careful consideration by the investment team."
She says the position, established in May, remains a fractional component of a highly diversified asset mix, and "we fully appreciate the risk and volatility characteristics of this emerging asset class", though noted members have benefited from the position - Bitcoin's price has climbed 86% since May.
The exposure "recognises structural changes in the industry over the past year", she says, including the launch of exchange-traded funds by leading international investment managers - BlackRock, Fidelity, Bitwise, Ark Invest, Invesco, Franklin Templeton, Valkyrie, VanEck, and WiseTree - which have pulled in US$55.6 billion in flows since inception.
Australia's largest super funds, however, remain unconvinced.
AustralianSuper head of asset allocation Alistair Barker recently said at its annual member meeting that "we're not currently considering cryptocurrency".
He said while the fund is exploring blockchain as a potential investment opportunity, having made some "small investments in companies we believe can use the underlying technology", in domains such as registry businesses, it nevertheless continues to grapple with how best to value cryptocurrency.
"As a responsible investor, we're required to make sure that every asset is valued fairly," he said, but also noted that, as investors, the fund must identify what the worth is of an underlying investment, adding that "the critical challenge with cryptocurrency is how to value it".
"... most assets are valued on the basis of what income they generate and given those underlying investments don't necessarily generate a great deal of income, it's very difficult to form a view on value," he said.
Retail superannuation giant Colonial First State also said no to crypto, with its chief investment officer Johnathan Armitage explaining that crypto's characteristics aren't the right ones to have within a super portfolio, though, like AustralianSuper's Barker, said that what's interesting is "the underlying technology that sits behind cryptocurrencies".
"The opportunity to use that technology [blockchain] to perhaps reduce friction that sits within the financial system is very interesting, and there are a number of companies, particularly in the listed arena, predominately in the US, that we're invested in, which provide access to those underlying technologies," he said.
Meanwhile, UniSuper chief investment officer John Pearce, speaking at the fund's annual member meeting this month, quashed any notion of allowing members to have voluntary exposure to bitcoin.
He also swatted down suggestions that other pension funds are investing in bitcoin.
"... we're not seeing much evidence of that at all. What you're seeing is retail platforms using bitcoin to trade, potentially some endowment funds are using it, but we're not seeing pension funds," he said.
He added that shouldn't come as any surprise as "having a punt on bitcoin" or any other cryptocurrency isn't what life savings should be invested in.
However, Shelley said AMP doesn't believe this is a speculative investment.
"We have conducted extensive research to support our inclusion of Bitcoin in our DAA program. The exposure is managed dynamically in a risk-controlled way using a selection of evidence-based signals that have been shown to generate consistent profits for our members across multiple asset classes," Shelley said.
She also countered the argument that there's minimal evidence of other funds investing in crypto, stating that many of them have Bitcoin exposure from their global equity allocation and benchmarks.
Notably, MicroStrategy (MSTR), which trades on the NASDAQ and invests in Bitcoin, is a member of the MSCI World ex-Australia index - the benchmark set by the Your Future, Your Super framework.
Cryptocurrency-exchange Coinbase (COIN), which holds Bitcoin, is also a member of the same index.
She said that as a responsible investment manager, it was important on behalf of members to assess digital assets investment merits, and the probability of strong performance continuing in the long-term.
"This aligns with our investment philosophy that successful investing for our members requires disciplined curiosity, and identifying how the future is likely to be different from the past," she said.
"Following the status quo results in average returns by definition."
On AMP stepping into the crypto space, crypto-exchange BTC Markets chief executive Caroline Bowler said that by integrating Bitcoin into their Dynamic Asset Allocation program, they've demonstrated a "forward-thinking mindset" that aligns perfectly with the transformative changes we've seen in the financial industry this year.
"By acknowledging the volatility and managing the exposure to only 0.05% of their assets, they're not just dabbling; they're taking a measured step into digital assets. This cautious, yet innovative, approach ensures that super members can benefit from Bitcoin's upward trends while being shielded from its notorious swings," she said.
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