Disintermedation of the Mutual Fund Foretold by Nobel Winner
Jul 13th, 2006 | Filed under: Hedge Fund Industry Trends, Portable Alpha & Alpha/Beta Separation, Retail InvestingBy: Alpha Male
In the 1930’s, a commerce student at the London School of Economics named Ronald Coase traveled throughout the United States conducting research for a research paper he called The Nature of Firm. In 1991, he won the Nobel Prize for Economics for this and similar studies. In his seminal paper, he tackled the audacious question, Why does the firm exist? His answer was simple and eloquent. The firm exists because transaction costs require them to. In other words, the task of coordinating resources was so complex; it needed to be centrally managed by a head office. Companies could not rely on the free market to provide the resources they needed because the costs of transacting business with outside firms was simply too high.
As processes and technology improved during the 20th century, it became possible to outsource commodity functions to outside businesses and still be able to have a reliable supply chain. More recently, the Internet has made transaction costs even cheaper and corporations have outsourced more and more of their non-core functions. In a sense, the “gravity” holding the corporation together is weakening and functions are drifting off into space. Companies have become virtual as previously in-house functions become part of a loose federation of businesses that some commentators have called Business Webs (e.g. Futurist and author Don Tapscott). An obvious example of this phenomenon is the proliferation of on-line travel websites such as Expedia or Travelocity. New technologies (the Internet) now allows travelers to bypass the traditional aggragator (the travel agent) and pick from a menu of options to assemble a customized vacation.
But what does this have to do with mutual funds? In much the same way that disruptive technologies forced GM to sell off its rubber plantations, parts factories, and financing companies to focus on designing and marketing cars, analogous disruptive technologies will soon force mutual funds to divest themselves of their non-core (commodity) functions - like investing in ETFs and cash.
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