Allocation is one of the key words in the world of asset management. It determines the percentage of capital an investment advisor recommends their clients to allocate for a purchase of a certain asset.
As cryptocurrencies have entered the financial mainstream, traditional managers can no longer ignore their clients’ demands. Slowly but surely, crypto is making its way into model portfolios.
Here’s a recent example from Morgan Stanley Global Investment Committee. The wealth unit recommended advisors to allocate between 0% and 4% to crypto.
The 0% case, which means a complete absence of crypto in the investment portfolio, is offered to clients seeking wealth preservation. This is not surprising as such portfolios are typically staffed with instruments that have minimal risk profile.
It remains to be seen whether such an approach can save the purchasing power of capital in the modern world. However, demand for such options remains high. Primarily, it comes from retired investors who have left the workforce and are unwilling to take additional risks.
According to Morgan Stanley, risk-tolerant portfolios can have between 2% and 4% in crypto, depending on the desired risk level. The maximum allocation is intended for an opportunistic growth profile, which means that an investor is ready to accept above-average risk to reap higher rewards.
At first glance, the 2% – 4% proposition for crypto allocation looks modest. However, we are talking about multi-asset portfolios, which can theoretically include any asset that is available in the global marketplace. Individual elements typically have limited allocation in such portfolios, as managers include multiple assets to manage risk properly.
The world of crypto includes millions of cryptocurrencies, most of which are completely invisible to investors and barely have any market cap. Just a handful of cryptos have accumulated sufficient market cap and trust among the investment community, so that they could be included into recommendations by Morgan Stanley and other investment companies. This fact limits potential crypto allocation in model portfolios, as a single asset (for example, Bitcoin) could end up taking up too much weight in the portfolio.
Anyway, the inclusion of crypto in Morgan Stanley’s recommendations is a major step forward for the entire crypto market. Morgan Stanley’s investment advisors help oversee as much as $2 trillion in assets, so their decisions and advice can impact virtually any asset class.
Most importantly, client demand for crypto has grown to the point where it cannot be ignored by leading investment firms. Sooner rather than later, all major investment companies will have crypto allocation recommendations and also include crypto in their official model portfolios. Obviously, it will serve as a positive catalyst for leading cryptocurrencies.