Super funds face ‘interesting conundrum’ with crypto allocations

An industry professional has cited institutional take-up of crypto as a tailwind for the asset class in 2024, although superannuation funds are on a seemingly slower track to adopt such allocations.

Over the past 12 months, average daily volumes for Australian crypto ETFs have expanded by some 800 per cent compared to the average daily volume.

Following the Securities and Exchange Commission’s (SEC) backing of bitcoin ETFs in the US, a number of funds, including VanEck and Fidelity, have authorised to issue securities tethered to the movements of the cryptocurrency in a move that has been widely celebrated as an endorsement of crypto as the newest asset class.

This vote of confidence, according to Global X, has triggered inflows of millions of dollars into its crypto ETF suite alone, which has quadrupled in size over the last year.

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“Super funds have a duty to their members and their trustees to act in their best interest[s] and to make sure they are growing the pool of wealth so they could definitely start exploring the space because it’s starting to emerge as a different asset class,” said Global X Australia investment strategist Marc Jocum.

“It’s not going to come in one wave, a lot of super funds prefer, and if you look at some of the things they’re investing in, it’s things like private credit that seems to be a lot of where the super funds are driving their attention.

“But you know, it could be that they start to see this as an emerging asset class and this could even see the price of bitcoin go further.”

Previously, a lot of institutional investors like pension funds and wealth funds hesitated when it came to bitcoin allocations “because they didn’t really know how”, Jocum said.

“A lot of them didn’t really want to open up their own wallets with these custodians. They wanted an easy-to-use wrapper, such as an ETF or another fund, to be able to do it, so we could [now] see a big institutional push into cryptocurrencies like bitcoin,” Jocum said.

Last year, NZ Funds Management introduced a weighting of 5 per cent to bitcoin to its KiwiSaver Growth fund and chief investment officer James Grigor said it would be likely to feature in more schemes in the next five years.

Similarly, in Australia, micro-investing app Raiz Invest launched an investment portfolio with a 5 per cent target allocation to this alternative asset class.

Still, there remains the question of liquidity, which many funds have been grappling with in the last year, the investment executive acknowledged. 

“Cryptocurrencies are pretty much 24-hour-a-day markets that have a lot of liquidity, a lot of transparency [and] it’s decentralised. The question is, will super funds want that?” he said.

“They’ve been driving a lot of their returns in the less liquid space, things that don’t get valued every single day, so it’s going to be an interesting conundrum for super funds.

“In terms of tailwinds, institutional take-up will drive the price of bitcoin higher. It’s just a matter of how many of them come and do they come as an earlier adopter or are they more on the laggard side?”

One of Australia’s largest super funds, Australian Retirement Trust, had previously ruled out the potential of investing in crypto.

Speaking at an adviser roadshow in April 2023, ART chief economist Brian Parker was asked if there was a price the fund would consider investing in cryptocurrency bitcoin.

“There is no price where bitcoin is attractive, you punt in bitcoin and we are in the investment business. It is highly speculative and run by dodgy people trading in completely opaque markets, it is highly volatile,” Parker said.

Global X’s Jocum also recognised a prevailing sense of “nervousness” regarding crypto investments.

“We saw the likes of the FTX collapse, there’s been a few security risks, it’s still 13 or 14 years old technology,” Jocum told Super Review.

“I think super funds will eventually get there, but it’s going to be a slow adoption.

It could be something some fund members seek in their portfolios as potential hedge, but others might seek “a boring portfolio that sees them out to retirement.

“The last thing they’d want is to see the nest egg they’ve built up capitulate by dropping 70 or 80 per cent.

“That’s why a lot of these super funds will have to position size in their portfolios to have a small allocation to cryptocurrency, whether that’s 1 per cent or 2 per cent. Some [may] like it high but it’s not going to be the key driver.”