In yet another example of the ever-expanding power of social media, a startup investment platform is hoping to invade the mutual fund industry's turf by hooking up investors directly with money managers via such social-networking websites as Facebook and Yahoo.
A website called kaChing.com will link investor brokerage accounts with as little as $3,000 to a platform of money managers that can be tracked for a 1.25% management fee plus trading commissions that range from 50 cent to $1. It promises investors full, live portfolio transparency, as well as the ability to communicate with portfolio managers, who will regularly post the rationale behind their trades and strategies.
Key to the success of the platform, which is scheduled to go live today , will be participation among registered investment advisers and established money managers.
The company built a network of portfolio managers by marketing the site through social media such as Facebook, Yahoo and the iPhone.
It may also use these sites to attract investors.
The portfolios are managed by the full spectrum of what one might expect to find in an open Internet casting call — professional money managers, amateur traders, hobbyists — but that doesn't mean they shouldn't be taken seriously.
Before any portfolio manager is cleared for tracking by investors on the platform, he or she must be elevated to “genius” level, which requires a verifiable track record of at least one year, as well the basic regulatory requirements that are similar to those of a registered investment adviser.
But the biggest requirement for managers on the platform, and the one that makes kaChing an operation worth watching, is the so-called IQ score, which is generated through a calculation of risk-adjusted returns, historical style drift and research characteristics.
The platform will adjust each portfolio manager's posted IQ and alert investors whenever it detects factors that may alter the strategy, such as style drift or increased risk taking. This is all part of what kaChing Group Inc. co-founder Dan Carroll enthusiastically dubbed “radical transparency.”
At the launch, there will be 12 portfolio managers with the requisite investing IQ of at least 140, placing them at genius level in kaChing's ratings system.
“The mutual fund industry hasn't seen any innovation in 20 years, and consumers deserve a better way to invest,” said Mr. Carroll, who also happens to be one of the platform's geniuses, with an investing IQ of 148. He said he has been managing money under the macro strategy for two years.
“We're allowing investors to communicate with the portfolio managers and see all the research he entered for each position so you can see how he earned his performance,” Mr. Carroll added.
The platform in many respects is comparable to one launched in July by Covestor Investment Management. This suggests the emergence of a legitimate trend that could have an effect on the way money management is provided.
Like kaChing, the Covestor platform is tapping a broad range of money managers to reach a subset of retail-class investors.
The platforms borrow a page from the separately managed ac¬count model by enabling investors to allocate assets to different strategies, but they remove from the equation the financial intermediary, a staple of the managed-accounts model.
The Covestor and kaChing platforms have distinct fee structures for investors and manager compensation, but both rely heavily on the one element that is difficult to find in traditional asset management — full portfolio transparency.
While the transparency requirement will deter some money managers from joining such platforms, it represents an upside to Andy Mathieson, managing member of Fair¬view Capital LLC, which has $400 million under management.
For him, the decision to join the kaChing platform was driven by a desire to cost effectively manage money for people who could not meet the firm's $1 million investment minimum.
“We believe we're a service that should be bought rather than sold,” Mr. Mathieson said. “This is still very, very early-stage, compared to nearly 100 years of mutual fund history, but the mutual fund model, for better or worse, has poorly served the in¬vestor, and this new model allows investors to invest based on fully transparent information.”
A new Investment Insights column appears every Monday on InvestmentNews.com.
E-mail Jeff Benjamin at
[email protected].
