Several Morgan Stanley Counterpoint Global funds, including Morningstar Medalists Morgan Stanley Institutional Growth and Morgan Stanley Institutional Discovery, can now invest in bitcoin. The foray into this volatile cryptocurrency is limited, though, and consistent with these funds’ aggressive risk profiles, so their Above Average Process rating and overall Morningstar Analyst Ratings remain intact.
Investing in bitcoin is an extension of the investment approach of the Counterpoint Global team and its skilled lead manager Dennis Lynch, who focus on disruptive change. They’ve considered investing in bitcoin for a few years before the March 31 filing disclosing the strategies’ new capability. The team thinks bitcoin might help their portfolios when its equity positions are out of favor. The cryptocurrency’s big upside potential is another draw.
In practice, the funds will invest through the Grayscale Bitcoin Trust (GBTC) or cash-settled bitcoin futures. They’ll cap exposure at 5%, though Lynch has told Morningstar in the past that the strategies would more likely start with positions of 50 to 100 basis points at cost. This approach aligns with the team’s thinking on portfolio construction for its equity holdings. While the team typically prefers equity positions of 2%-5%, it takes smaller initial stakes in firms with binary outcomes or excessive risk, though it may let successful positions grow. The team intends to keep its portfolio’s bitcoin exposure from getting too big, though given the cryptocurrency’s volatility, that could prove tricky.
Beyond volatility and the chance bitcoin could go to zero, there are liquidity, cybersecurity, and regulatory risks. Bitcoin is not as heavily traded as traditional investments; it can be stolen, corrupted, or manipulated digitally; and it’s not traded on a regulated exchange, yet. New regulation could change its character and risk profile. While seemingly cutting-edge, other cryptocurrencies could displace bitcoin. Meanwhile, some of the team’s funds already have indirect bitcoin exposure; Morgan Stanley Institutional Advantage and Morgan Stanley Institutional Growth each had large positions in Square SQ as of December 2020, which recently invested in bitcoin.
Not many mutual fund managers have started investing in bitcoin in their public portfolios yet, though some have talked about it and amended their prospectuses to allow it. Bill Miller’s Miller Opportunity recently changed its prospectus so it could invest up to 15% of assets in Grayscale Bitcoin Trust; Miller previously owned it in a privately managed vehicle.