Disruptive Investing

We're going to build upon our ideas that the financial industry is a supply chain and information and value flow in both directions, inbound and outbound. See our Mutual Fund Industry Supply Chain Model post. The greatest point of value creation is at the portfolio construction stage (creating and maintaining that list). Preservation of that value (capital) must be supported across the supply chain. Propagation of that value can be diluted when repackaging occurs, that is, when mutual fund wholesalers and distributors (middle men) and financial advisors create bundles of mutual funds with other assets that change the expected returns, diversification, volatility and relative performance, while also adding on expenses and fees, directly charged against the capital. Pervasive technology, proven processes, and experienced people, at all stages assures value, preservation and risk control, or at least, it should. Because of time periods and variability, regeneration (maintenance) must...

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 v...

• Mutual Fund (simplified) – A particular collection of financial instruments controlled and created by a manager with fiduciary responsibilities to buyers (it is a list, a virtual asset of virtual assets) Characteristics of this List: • Stocks and / or Bonds and / or Cash (limited to some particular blend) • Focused on particular ‘sector’ (industries and sub-industries) • Controlled by geographic boundaries (regions, countries, continents) • Limited by charter to particular ‘styles’ (think style boxes) • Restrained in types of trades and % Cash (usually no derivatives, shorting, options) • In exchange for the manager (cost overhead), Buyers expect – Preservation and Growth of their capital (above averages) – Returns in the forms of dividends, capital gains distributions, … – Steady, smooth NAV, no surprises, low volatility – Salability / liquidity •Value is “created” by the superimposition of the collective performance of the individual virtual assets as a grouping (lis...

We usually think of assets as stocks, bonds, bank accounts, real estate, mutual funds, and other securitized instruments. Stocks are documents that grant rights to their owners, rights that relate to a particular company. • Companies are legal entities recognized by federated corporations (countries, states, municipalities, each other, persons, …) – Hard assets (equipment, factories, …) – Soft assets (processes, patents, secrets, …) – Operate in uncertain markets, thus have risk – Risk needs to be divided and shared, to reduce it • Companies thus sell financial instruments (virtual assets, ideas) – Stocks and Bonds, for “Cash” or “Credit” • Cash is a Promissory note to pay some form of value (capital) • Value is “created” by the signatures of the executors – Exchanged for either “shares” or “promise of coupon” – Shares pay dividends and / or have “growth” – Bonds pay interest and have “stability” – Promise of future performance determines market value of inst...