From the rise of cryptocurrency DogeCoin and non-fungible tokens to Reddit members beating hedge fund managers at their own game, 2021 has been an eventful year in the world of retail investing.
And while institutional investors might not be betting big on Gamestop Corp. or Elon Musk’s latest cryptocurrency tweet, some have inched closer to retail investment trends in recent years.
In 2018, two public pensions in Virginia’s Fairfax County — the Fairfax County Employees’ Retirement System and the Fairfax County Police Officers Retirement System — made investments of US$10 million and US$11 million, respectively, in Morgan Creek Capital Management’s blockchain opportunities fund. This was followed, in 2019, by additional investments — US$30 million from the employee plan and US$22 million from the police plan — to the fund’s second iteration. And earlier this year, the police pension made two additional US$16-million commitments: one to a third Morgan Creek blockchain fund and another to a fund managed by venture capital firm Blockchain Capital.
So far, the strategy has paid off, with the first two Morgan Creek funds generating three- and five-times returns on initial investments, respectively, says Katherine Molnar, chief investment officer at Fairfax County’s police pension. “We saw it as a tremendous growth opportunity and we weren’t specifically targeting cryptocurrency or Bitcoin. It was more of a play on blockchain technology itself. We saw it as a tremendous growth area and we’re viewing it as a venture capital investment,
even though there’s a portion that’s liquid because it’s cryptocurrency.”
By investing in a private fund with no direct exposure, Molnar says the pension plans avoid the daily volatility associated with the crypto sector. And while there was some initial concern among plan members, the strong returns have put most of those fears to rest.
“Initially, [the plan member response] was very mixed,” she says. “We had some trustees that went with us to the initial meeting and spent four or five hours onsite with a manager. They were quite comfortable, but there were other retiree groups who were — at least initially — very concerned. Of course, the funds have done extremely well, so we don’t hear too much about it at this point.”
With a focus on blockchain technology rather than a specific cryptocurrency, the Fairfax County plans are also exploring investments in NFTs, says Molnar. “We haven’t yet gone out and bought tokens ourselves, but we continue to look at the space and some managers that specialize in cryptocurrency and tokens that aren’t involved in classic venture capital investments. . . . For institutional investors, everyone has to be a bit open-minded because this area is very new and the service providers are also new. Some of the classic [investment] infrastructure hasn’t been built.”
Arthur Salzer, chief executive officer and CIO at Oakville, Ont.-based Northland Wealth Management, says while institutional investors should approach cryptocurrency with caution, the asset class — specifically Bitcoin — can buoy portfolios. “It’s an asset class that zigs when others are zagging. It has the ability to improve performance or to generate a more consistent return, depending on the size of allocation you use within a traditional 60/40 portfolio. . . . You have to do a lot of work before making an investment and you need to understand they’re extremely volatile on a daily basis, probably four- to five-times more volatile than tech stocks are.”
Pension plans are also benefiting indirectly from retail investment trends. In late January, the Ontario Teachers’ Pension Plan sold its 16.4 per cent share in Macerich Co. for nearly US$500 million. Macerich, which owns nearly 50 malls across the U.S., saw its shares increase sharply in value after retail investors on Reddit began pumping up the stock as a short-squeeze candidate, due to its proximity as a landlord to video games retailer GameStop and cinema chain AMC Entertainment Holdings Inc., the two companies at the centre of the recent stock frenzy.
“We’ve been a long-term investor with Macerich and throughout this relationship they’ve been a valued partner,” said Dan Madge, a spokesperson for the Ontario Teachers’, in an emailed statement to Benefits Canada at the time of the Macerich sale. “Moving forward, we’re focused on scaling and diversifying our global real estate platform and growing our existing Canadian real estate business.”
Bill Callahan, a U.S-based investment strategist at Schroders, says the Reddit-driven stock rally also served as a wake-up call for institutional investors, in terms of risk and investment management. “When you’re investing with a manager with great returns, they’re taking risk somewhere — and you need to know ahead of time what form that risk takes and where it’s coming from. A lot of these hedge funds that were short way too much on some of these stocks were taking extreme risks and I would venture to guess their investors didn’t know exactly what [these hedge funds] were doing. There weren’t enough guardrails in place.”
Callahan says while stocks currently popular among retail investors — such as cannabis and electric vehicles — are likely too volatile for the tastes of institutional investors, there are opportunities in blockchain-based sectors like cryptocurrencies and NFTs. However, he says investors such as pension plans need to exercise due diligence before committing their members’ money.
“The lesson investors need to continually learn over and over again is that just because you get the idea right — that something may be new or important — doesn’t automatically make it a great investment. Broadly, in the 90s, investors got it right: the internet was going to change the world. Unfortunately, in the meantime, most, if not all, of them lost money by paying the wrong price for those assets.
“There’s certainly interest in cryptocurrency, but the key there is to be a little more discriminating than just buying DogeCoin because Elon Musk tweeted about it. . . . It goes back to that second level of due diligence: do we think crypto will be a bigger part of the future in blockchain? Yes. But does that mean every single token or coin is worth the investment? Absolutely not.”
Blake Wolfe is an associate editor at Benefits Canada.