From Jirisan Asset management:
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 MORE
HT: FT Alphaville's
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