LeapRate Exclusive… Patrick Springer, former MD of Morgan Stanley, has joined LeapRate to share some details on asset tokenization and why rebalancing your asset allocation is the next best move.
LR: Hi, Patrick and thank you for joining us today. I came across your article about allocating assets the other day. Could you explain LeapRate’s readers why rebalancing your asset allocation is the next best move?
Patrick L Springer
Patrick: Investors of all types, individual as well as institutional, often have trouble timing the market for entry and exit. Classically, investors tend to chase stocks on the way up, and sell stocks when they are declining. But it’s usually the amount of “time in” the market vs. “Timing” the market, that makes an investor successful, especially if they have a time horizon of several years or more.
As we enter 2019, one only reads negative comments about global stock markets, but it’s likely not helpful to try to sell now. Investors of all types should have a basic allocation strategy for their retirement or college-savings accounts, and annually contributing to those accounts and investing according to that allocation has been one of the best ways to make steady returns.
I have done some interesting analysis of the S&P 500, the benchmark US equity index. The US stock market appreciates with economic growth and profit growth, and the key is that when invested on a multiyear basis (five or ten years for example), it is really hard to find a period of time where the economy did not grow, and consequently when investors have lost money.
Since 1945, there have only been two five year periods that the S&P 500 generated a negative five-year total return (total return includes price returns, dividends, and distributions), and that was in 1974, and 2004. On a ten-year basis, the S&P has never generated a negative total return, the lowest was +0.75 in 2008.
Otherwise, the long-term five and ten-year average annual return for the S&P has been 14% and 12%, respectively, and in the past 17 years through 2017, the ten-year average return has been 8.6% per year. I have a chart on this.
In conclusion, given the long-term performance of US equities, it makes sense to try to rebalance and buy more of the market when its’ down rather than when it is up.
LR: What is asset tokenization?
Patrick: Asset tokenization is the process by which an asset can be listed and exchanged via blockchain technology. Currently, publicly listed stocks, some bonds, and commodities like gold are easily traded and settled via exchanges nearly effortlessly. For the largest companies and governments in our global economy, our capital markets work very efficiently. However, relatively few companies, usually the largest and most high profile, can easily raise capital and list in this manner.
It is expensive for a company to do so. Blockchain technology can allow for many types of companies to raise capital. Assets such as loans, real estate properties, and equity stakes, both private and public equities, can be listed as tokens.
Computer programs called smart contracts can be embedded with the token. These smart contracts can perform legal, financial and registry functions, and allow for certain investments to be limited to only appropriate types of investors. This can reduce the costs of transactions significantly. Someday, personal homes and residences might even be tokenized.
LR: Some claim that asset tokenization is the strongest cryptocurrency trend right now. What do you think?
Patrick: Since asset tokenization is based on real assets that have an inherent value already, there is a strong business case for investing in tokenized assets. One issue that needs to be resolved is the need for a stable coin to transact in tokenized assets. Given the volatility of cryptocurrencies, institutional and other investors want to make sure the medium of exchange is stable.
LR: Why tokenize “real world” assets? What are the key benefits of tokenization?
Patrick: There are a number of reasons why tokenizing real-world assets makes sense. Two key ones relate to efficiency and the accessibility of markets. Regarding efficiency, while stocks and bonds trade efficiently in the world as we know it, there are many assets that trade inefficiently or are very illiquid. One of the most common assets to own in the world is real estate, but the costs of transacting are expensive and very time-consuming. Bank guarantees and documentation, title confirmation, and the use of lawyers to oversee and confirm a transaction are all quite costly. Immutable records of ownership and documentation via blockchain increases trust so that transactions in real estate and other assets will happen faster than before, and much more cheaply. And listing a property via a token may open up a real estate asset to more than just local buyers.
Regarding accessibility of markets, there are huge swaths of the global economy that are under-served by the global capital markets system. Only the best companies can raise private equity from the most prestigious venture investors, and later list via the global investment banks. Many more companies would like to efficiently list loans or equity stakes rather than hoping for financing from a large bank or large corporation. We can see that some people and small businesses can raise money via crowd-funding. There is a very large white space of opportunity in between that blockchain technology will help address.
LR: Will asset tokenization on blockchain disrupt the asset management landscape?
Patrick: I do not think that will happen for a long time. Asset tokenization will evolve over many years. It will also open up the market for new types of investments that were not easily available to many asset managers. Tokenized private equity will be very attractive for asset managers.
Patrick Springer is a member of the board of advisors for Polybird Exchange, an end to end issuance & exchange platform for tokenized assets.
Springer recently completed a more than twenty-year career at Morgan Stanley where he was a managing director in their institutional securities business. As a leader in their global equities business, he advised North-American based institutional equity investors and led the distribution of numerous international equity offerings deals, helping raise upwards of $50 billion of capital for global corporations in technology and other industries over the past ten years.
Springer has an MBA in finance and marketing from the University of Pennsylvania’s Wharton Business school, and degrees in economics and Asian languages from Rutgers University.