It has been difficult to ignore bitcoin in 2021. Too difficult, it would appear, for those bastions of long-term investing: mutual fund managers.
The cryptocurrency hit headlines this year for soaring prices. It is up around 75% since the start of the year having hit $50,000 in the middle of February and garnered even more attention on the news that Tesla had invested $1.5bn, or 9%, of its cash balance in it.
And it is not just Elon Musk who has made an allocation. Some well-known portfolio managers are making moves too, or at least letting it be known that they are considering it.
In late January, BlackRock submitted a filing to the Securities and Exchange Commission to allow two funds – the $25.4bn BlackRock Strategic Income Opportunities and $15.9bn BlackRock Global Allocation funds – to invest in bitcoin futures.
Both funds are helmed by BlackRock’s CIO of global fixed income, Rick Rieder, who told CNBC in February that he had now begun dabbling in the cryptocurrency.
‘Crypto generally has gotten to the imagination of a lot of people,’ he said. ‘Today, the volatility of it is incredible, but people are looking for storehouses of value, places that could appreciate under the assumption that inflation moves higher and debts are building. So, we’ve started to dabble a little bit.’
‘My sense is the technology has evolved and the regulation’s evolved to the point where a number of people think it should be part of their portfolio.’
Those people include Rieder’s fellow fund managers.
Bill Miller, who has long been a cryptocurrency investor in his hedge funds, has also filed to access bitcoin via his mutual fund, the $2.7bn Miller Opportunity fund.
Other big-name managers are talking about it too.
Morgan Stanley Investment Management’s Counterpoint Global team, led by star manager Dennis Lynch, is reportedly exploring whether to invest. And DoubleLine CEO Jeffrey Gundlach tweeted on February 17 that bitcoin, rather than gold, might be the ‘stimulus asset.’
‘I am a long-term dollar bear and gold bull but have been neutral on both for over six months. Lots of liquid poured into a funnel creates a torrent. Bitcoin may be The Stimulus Asset. Doesn’t look like gold is,’ he wrote.
That all these managers are buying or are interested in buying bitcoin is great news for headline writers but a more complicated proposition for due diligence analysts who own their funds. What to do if your top equity pick or income model now includes crypto?
But why, though?
Gatekeepers Citywire spoke to for this article said that while they would not drop a fund for buying bitcoin, they would want to speak to the manager as soon as possible to understand their rationale for the allocation.
‘Does it [bitcoin] seem to fit with their typical investment universes and their philosophy?’ Scott Lavelle, director of investment advisor research at PNC Asset Management, asked. ‘Do they reasonably have some sort of expertise?’
Rieder’s rationale, per his CNBC interview, was to have bitcoin exposure as a diversifier to cash.
‘We’re holding a lot more cash than we’ve held historically. It’s because duration doesn’t work, interest rates don’t work as a hedge, and so diversifying into some other assets makes some sense,’ he told the network.
Lavelle said the BlackRock Strategic Income Opportunities fund was a flexible strategy with a broad universe of potential investments, so bitcoin could fit within that. However, he would still want to know how the manager planned to size any allocation and how they would be managing the risk from that position.
Like Lavelle, Ryan Lange, senior investment officer at Great Western Bank, would want to understand a manager’s reason for buying bitcoin and how it fit with their wider philosophy.
‘I would be curious what their investment thesis is around it, and how that ties into the underlying asset class that their investment strategy is normally operating within,’ he said. ‘Why [does] opening the door to include bitcoin help the shareholders at the end of the day? I would be open-minded, listening to what the rationale is.’
Lange said managers would need to have strong opinions to back up their positions and that he would likely be less interested in managers for whom bitcoin was diversifying away from their core competency.
‘The more that they begin to move away from the true asset class exposure that I have hired [them] for, the harder it would be for me to justify using them within a diversified portfolio, playing whatever role that we want them to play within it,’ he said.
Another head of research, who asked to remain anonymous, told Citywire that the range of managers expressing interest in bitcoin also highlighted the different ways it was seen, even by professional investors. They said the aggressive growth equity funds run by Morgan Stanley were clearly very different from the income-focused BlackRock fund, with one perhaps viewing bitcoin like a stock and the other seeing it as a store of value.
Old hands
Mutual fund and ETF managers buying bitcoin is not an entirely new phenomenon. The likes of ARK Invest’s Cathie Wood and Horizon Kinetics’ Murray Stahl have both been invested in the cryptocurrency for some time, both via the Grayscale Bitcoin trust, an open-ended grantor trust that is invested exclusively in bitcoin, with the objective of having its net asset value per share track bitcoin’s market price. Historically, it has been the only pooled bitcoin vehicle to trade over the counter, making it available to all investors, although this is now changing. Miller’s filing allows him to invest up to 15% of his fund’s assets in Grayscale.
Stahl’s $239m Kinetics Internet fund had about 40% of its assets allocated to Grayscale as of the end of 2020. This was up from about 20% at the end of September that year, likely a reflection of bitcoin’s meteoric rally in the past five months.
Wood’s $5.72bn ARK Next Generation Internet ETF had 5.19% of its assets allocated to the Grayscale trust, its second-largest holding after Tesla, which has exposure to bitcoin too now.
Wood’s flagship fund, the $17.6bn ARK Innovation ETF, has previously owned Grayscale too, allocating 1% of assets to the cryptocurrency in 2015 when it was priced at $250, but selling out in 2018. In a December 2020 interview with Bloomberg, Wood said the firm was forced to sell when the position reached 10% of the fund, citing the tax treatment of gains from unqualified income and 40 Act rules. In the same interview, she said that in the firm’s fully discretionary portfolios, which are not subject to 40 Act rules, her bitcoin allocation was about 7%.
‘That is how optimistic we are on it,’ she said.
Data from Morningstar Direct (see table) shows that Stahl and Wood were not the only managers to be invested in Grayscale. Some of the holding data is old and it is likely that there are now more mutual funds holding the trust, but even data from the end of 2020 shows an increase in funds that own the trust – 13 – compared with the second quarter of 2017, when Citywire last ran this screen, when just nine funds owned Grayscale.
For Lavelle, Stahl and Wood are examples of managers for whom bitcoin clearly fits into their wider thesis.
‘For some like Cathie Wood who likes innovation, it aligns with that. And for Murray too, his portfolios have always been very eclectic. He’s typically doing things that are very different.’
For Lange, the idea of bitcoin being held in a fund made the most sense if it was part of a real return strategy, which already invests in currencies and commodities.
‘It seems like it would almost fit better into a liquid alts-type solution, as an extra diversifier, potentially, if you did it with the right risk controls around it,’ he said.
Mainstream or mania?
However, even when bitcoin fits into a fund’s philosophy, most gatekeepers said that, were they to have an allocation to the digital currency in their portfolios, they would rather control this themselves than have exposure through a holding in a fund. We explore the options for such an allocation on page 26.
While demand for bitcoin has clearly been soaring, this has yet to reach home office portfolios. One head of research told Citywire that they were sure clients were buying bitcoin in their personal accounts, but none had asked for it to be part of their portfolios.
Lavelle said he took the trend seriously and might consider an allocation in the future.
‘It is something that is gaining more acceptance. I don’t think it’s a fad,’ he said. ‘It’s not new. It’s had a chance to die and it’s kept on living. The longer it’s been around, the [more] attitudes of large institutions have changed. I think it is here to stay.’
Lange was more skeptical.
‘I’m not saying that this ends up being a fad, but up to this point, it’s hard to see the long-term fundamental nature of something like this,’ he said. ‘And if it does come crashing down due to regulatory constraints, or some other types of issues that arise, I think people would look back at it as being a fad. But I don’t know how all this is going to play itself out.’
While Lavelle considered bitcoin to be an alternative currency, an uncorrelated asset to stocks and bonds, Lange was less constructive.
‘I don’t understand the long-term goals of bitcoin,’ he said. ‘If it’s supposed to be a currency, currency is supposed to be a store of value, and [with] something that bounces around as much as bitcoin does, [it] is hard to use that store [of] value argument.’
He also raised the issue of the huge amount of energy needed to mine bitcoin, and how this would seem to be at odds with ESG investing.
‘This kind of seems like an anti-ESG type of a product, just from my general understanding of it, unless I’m missing something,’ he said.
Managers, beware. If you are buying bitcoin, expect to be asked about this. And much, much more.