If you buy physical and digital products from Amazon, would you consider buying financial products as well? 70% of U.S. households trust Amazon enough to be Prime members (Consumer Intelligence Research Partners, 2017). In all probability, an even greater portion of households owning mutual funds are Prime members. I believe most of these customers would at least investigate the possibility of becoming an Amazon asset management client. It’s also likely that some non-trivial portion of this group would go on to become clients. Jeff Bezos’ disdain for Wall Street is well known, so it’s surprising that he doesn’t appear to have set his sights on asset management. If Amazon could decimate bricks and mortar retailers, what might happen to the asset management industry, where 35% operating margins are the norm?
How Amazon Can Gobble Assets
In addition to its home page, Amazon is rich with the most important resource in asset management: trust. The firm earned the highest reputation ranking in the U.S. in a 2017 Harris Poll. It was ranked as both the most influential and most trusted company in a 2016 survey by SurveyMonkey. It was the only company to land in the top 5 for both categories. Unlike a surprising number of tech companies, Amazon has paid attention to web security. When you’re handling other people’s money, competently allocating resources for security is critical. There are some asset managers and fund administrators I wouldn’t do business with because of observed technology or culture gaps with regard to security. The public’s familiarity with and trust in Amazon raises its brand to a privileged place in business. That doesn’t automatically translate to easy monetization in asset management. But Chinese tech companies show how easy it could be. Take a look at Alibaba, which is a Chinese incarnation of Amazon + eBay + Paypal + Mastercard + UPS +… Fidelity. In just 4 years, it has come to manage the world’s largest money market fund, according to the Wall Street Journal. The asset management world watched in awe and horror as the fund amassed $92 billion in its first year alone, becoming the world’s 4th largest money market fund in 2014. At first conceived as a holding place for excess funds held by Alibaba customers at Alipay (similar to Paypal), the fund exploded in popularity by combining an incongruously high yield with NAV principal stability. Alibaba has expanded its product line to include funds managed by other asset managers. It is possible that Alibaba eventually houses the world’s largest asset manager. Tencent, another Chinese internet behemoth, has also entered the asset management domain. Could Amazon embark on a similar venture?
Thought Experiment on the Amazon Fund Platform
Imagine that you go to the Amazon homepage. You click on a link labeled “Funds”, which is next to the “Prime” link. You are now on a fund products page, featuring a mix of Amazon branded and 3rd party funds. Just as you can buy an Amazon private label sweater for $7 or a branded sweater for $75, you can now buy a large cap U.S. equity index ETF from Amazon with zero management fees or the Vanguard equivalent with 0.04% in management fees. Trading in either ETF would occur with zero transaction cost for non-professional traders. Since placement on the Amazon platform is so valuable, external fund managers pay Amazon a fee, allowing Amazon to charge no transaction cost. Presentation of fund performance, performance attribution, and risk decomposition are standardized, colorful, and informative. It is superior to similar presentations by industry incumbents because Amazon specializes in presenting information clearly and quickly. At the first layer of detail, the information suits average retail investors. At the second and third level of detail, quant PhDs are satisfied. Just as Amazon doesn’t care which sweater you buy as long as it’s ordered through them, the company is indifferent to the debates between active vs. passive, open end fund vs. ETF, 60/40 vs. 130/30, domestic vs. international. If you want to buy it, Amazon will sell it. Do you like Southeast Asian casinos with artificial intelligence croupiers? You can find a niche ETF that holds that group of companies in either market cap weighted or equal weighted form. Amazon might even offer its own private label ETFs on simple indices (constructed by Amazon itself to save on fees it would otherwise have to pay to index providers). It might also offer private label risk factor strategies and unabashed active strategies, which will probably do no better, but no worse, than their peer groups. What we do know is that Amazon’s active strategies will be cheaper. The website offers funds that have both weak and strong historical performance because Amazon knows that historical performance is no indication of future returns. Amazon will offer it all, but provide adequate quantitative and qualitative disclosure so that end investors can decide.
You choose to sweep cash into the Amazon short term investment vehicle, which doesn’t guarantee NAV stays at $1, but tries hard to. Maybe Amazon uses funds from this account for corporate purposes, driving its negative net working capital into more negative territory. Account holders benefit from a slightly higher yield than they might otherwise get (due to Amazon’s low investment grade debt rating), and Amazon has a cheap funding source....MUCH MOREHT: FT Alphaville's Further Reading post