Executive Summary

SUMMARY

For over 150 years, the global economy and investors have been well served by collective investing and funds as a source of capital for growing companies and of investment returns for ordinary savers. Funds provide an opportunity to do something collectively that would be more expensive or difficult to do individually. UK funds now manage £1.4trillion of behalf of investors.

Over the decades, the fund has evolved to meet the modernising drivers of investor behaviour and technological change. Fund 1.0, characterised predominantly by a focus on active management through individual security and wider asset allocation, has given way to Fund 2.0, which has seen technology facilitate the emergence and significant evolution of both indexation and the Exchange Traded Fund (ETF).

As technological change accelerates dramatically in the era of blockchain and distributed ledger technology, this paper looks at three potential scenarios of what lies ahead. We ask whether the investment fund of the future – Investment Fund 3.0 – will become a more efficient version of Investment Fund 2.0, or if the concept of the fund itself may be transformed.

SCENARIO ONE: Business-as-usual enhancement

The first scenario extrapolates the enhancements of recent times into the future and produces a more efficient version of today’s fund. In this baseline view which underpins the others, the industry continues its modernisation agenda, facilitating speed, scale and efficiency, utilising new technologies and adopting tokenisation to enable fund shares and underlying asset classes to be traded more effectively. Consumers will benefit from incremental improvements to customer experience and be able to interact in a more informed manner with their providers.

SCENARIO TWO: Innovative evolution

The second scenario builds upon these enhancements and sees an evolution of greater significance, which results in an adaptation of fund operations and product delivery to suit new investor appetites and expectations. The conventional collective investing model develops through increasing numbers and diversity of thematic and specialist investment building blocks to help construct overall portfolios which are much more tailored to investor preferences. The extent of tokenisation in this view broadens market access much more significantly in areas such as private companies, infrastructure and native digital assets.

SCENARIO THREE: Transformative change

At the more radical end, the third scenario imagines a transformative shift where a much more interactive and participatory experience for investors is facilitated via hyper customisation, and where risk and return exposure is tailored by customers at individual stock and securities level, rather than at the fund level. This level of customisation is achieved through changing the relationship between the customer and their portfolio, increasing participation and altering the nature of delegation to a professional investment manager.

We may be on the verge of an era of much greater participation and engagement by some consumers, especially younger cohorts. At the same time, it is entirely possible, and even likely, that many customers will still wish to delegate decisions to trusted third parties and rely on more-established collective mechanisms.

Regardless of the exact trajectory, the investment management industry has a significant role to play in continuing to meet investor objectives, as well as changing societal expectations. In all likelihood, we will see a combination of all three scenarios, with the industry’s centre of gravity determined by the extent to which incumbents and new entrants drive innovation.

Firms clearly have a responsibility to determine their own position on this journey. At the same time, the policy and regulatory environment really matters and we therefore identify areas in which a close partnership between regulators and industry can work to boost the overall competitiveness of the UK:

1. Innovation:

Establishing the framework for tokenised funds to operate in the UK.
Creating a DeFi taskforce to assess the overall policy implications for the UK fund industry.
Retaining the important stance of 'same activity, same regulation'.
Consider establishing regulated routes for native digital asset exposure.
Approach DeFi reforms in an open-minded way.

2. Regulatory perimeter:

Defining the ‘rules of the road’ for cryptoassets.
Monitoring closely the unregulated arena for emerging developments.
Ensuring that investment firms are not exposed to the costs of failing stablecoin firms.

3. Regulatory change:

Addressing the advice gap by facilitating better support for consumers.
Completing UK Funds Regime Working Group reform implementation.
Enabling next generation digital information provision and disclosure to investors.

Domestic innovation can also be leveraged to support and evolve the UK’s international reputation as a world-leading financial centre. The sector is ever more important to its customers and the wider economy, the industry is about to undergo an exciting next stage of development.