Mutual Fund Industry Supply Chain Model

Figure 1 (click to enlarge)

The mutual fund industry consists of a complex web of connections, many to many relationships, wherein information is exchanged for value. Dissecting each class of member in this diagram, you can imagine what type of information trades for what types of value.

Value is created at the source, where mutual funds are generated and managed. Better fund cosntruction results in better value. Skilled fund managers tend to attract more assets under management (AUM). Even unskilled fund managers can too, if they have really good marketing, and good distribution via the channels.

Skilled and unskilled investors gain access to that value thru a variety of channels, and are willing to pay management fees for that value. Some call this value "alpha", that is, the amount of return gained above what the market would otherwise bear.

We can't forget risk, so investors are also 'buying' a certain degree of mitigation of risk which is another form of value in this case.

The channels and middle men earn fees from source and investor, for establishing connections, introducing relationships, managing those relationships, aggregating supply (of buyers) and demand (funds), and in some cases adding other investment vehicles as a value-add for the end clients.

One lesson to take from all this? Caveat Emptor! (buyer beware)