AlphaBlock's Competitive Landscape
We published this Cartesian competitive landscape in the AlphaBlock Pitch Deck to define what is happening in the investment management industry, where it is heading, and how to understand future innovation. Our thesis, is based on the fact that the Indexing companies offer concentrated non-diversified solutions, wrapped up by ETF (Exchange Traded Funds) companies into concentrated non-diversified solutions. And hence there is no, non-diversified, non-concentrated Index investing solution for investors that is less risky, outperforming, passive, alpha-generating alternative in the industry today. This is why AlphaBlock is placed on the right-hand top of the quadrant. We build Indexing solutions and offer them as Electronic Investment Funds, a better alternative to ETFs.
We wanted to explain that concentrated, idiosyncratic selections were Active. The industry which wants to continue striving to do the impossible that is select and beat the concentrated indexes, a difficult activity and sub-optimal, as it spends capital, and time to beat the market by offering riskier solutions [compared to passive] to investors, knowing very well that chances of failure are high. That’s the Active business model, which is struggling against the rapidly advancing passive.
The first mutual fund was formed in the United States in 1924. The mutual fund, called the Massachusetts Investors Trust, was established by a Boston investment company called M.G. Boynton and Company. It allowed individual investors to pool their money and invest in a diversified portfolio of stocks and bonds. The concept of mutual funds quickly gained popularity, and today there are thousands of mutual funds available to investors around the world.
Now, one may wonder, why knowing what we all know, why do AI, Active managers and Venture capital spend resources on reinventing something that has not proved itself since 1924.
The only answer we have for the oddity is that Venture, Asset Management needs revenue, which requires fees, and fees are near zero for passive. So Venture is convinced that Passive is about the impact and not about making money, as it is already commoditized. This is why we need innovation. A Financial innovation that enhances Passive, can generate Alpha on a diversified portfolio, and can charge fees on it like Active, is a game changer. This is AlphaBlock.
To make sure, we had the fundamentals in place and we had covered the essentials regarding the summary visual above, we decided to sound our ideas with ChatGPT. This is our discussion with ChatGPT.
Q: What is a competitive landscape?
A: A competitive landscape is an analysis of the competitive environment in which a business operates. It includes an assessment of the strengths and weaknesses of the competitors within the industry, as well as an analysis of the opportunities and threats that the business may face. Understanding the competitive landscape can help a business identify its unique selling proposition, develop strategies to differentiate itself from competitors, and identify potential areas for growth.
In general, a competitive landscape includes information about the following:
Understanding the competitive landscape can help a business make informed decisions about its own strategy, marketing efforts, and business operations. It can also help a business identify potential partners, customers, and opportunities for growth.
Q: Can you explain the competitive landscape in the investment management industry?
A: The investment management industry is a highly competitive market, with many firms offering a wide range of products and services to clients. There are several key factors that shape the competitive landscape in this industry:
Overall, the competitive landscape in the investment management industry is dynamic, with firms constantly competing to attract and retain clients by offering a range of products and services, targeting different segments of the market, and differentiating themselves through their pricing, marketing, and reputation.
Q: Why are Indexing companies not featured in this landscape?
A: Indexing companies, also known as index providers, are typically not included in the competitive landscape of the investment management industry because they do not directly compete with traditional investment management firms. Instead, indexing companies create and maintain indices, which are benchmarks that track the performance of a specific group of securities. Investment management firms may then use these indices as the basis for creating index funds, which are investment products that aim to replicate the performance of the underlying index.
While indexing companies do not directly compete with investment management firms, they do play a significant role in the investment industry as a whole. Many investment management firms offer index funds as part of their product offerings, and the use of index funds has grown in popularity in recent years due to their low fees and passive investment approach. As a result, indexing companies have a strong presence in the investment industry and are an important part of the overall competitive landscape.
Q: Would you agree that Active and Passive is a good segregation for the competitive landscape?
A: Active and passive investing are two broad approaches to investing that can be used to differentiate investment management firms in the competitive landscape.
Active investing involves actively selecting and managing a portfolio of securities with the aim of outperforming a benchmark index or achieving a specific investment goal. Investment management firms that follow an Active investing approach typically have a research-intensive process for selecting securities and may employ various tactics, such as market timing and stock picking, to try to achieve outperformance.
Passive investing, on the other hand, involves tracking the performance of a specific index or benchmark and investing in a portfolio that is designed to replicate the index's performance. Passive investing aims to match the performance of the underlying index, rather than trying to outperform it. Investment management firms that follow a passive investing approach typically offer index funds or ETFs that track specific indices.
While active and passive investing are two broad approaches to investing, it is important to note that they are not mutually exclusive and many investment management firms offer both active and passive products to their clients. In addition, the competitive landscape in the investment management industry includes other factors beyond just active vs. passive investing, such as the range of products and services offered, the target market, pricing strategies, and marketing and sales tactics.
Q: Would you agree that concentrated and diversified portfolio approaches could also define the competitive landscape?
A: Concentrated and diversified portfolio approaches can be another way to differentiate investment management firms in the competitive landscape.
A concentrated portfolio is one that is focused on a smaller number of securities, typically 20 or fewer. Investment management firms that follow a concentrated portfolio approach typically believe that a smaller number of high-quality securities can provide better risk-adjusted returns than a more diversified portfolio. This approach requires a high level of research and analysis to identify the best investments and may involve more active management of the portfolio.
A diversified portfolio, on the other hand, is one that is spread across a wider range of securities and asset classes. Diversification is a risk management strategy that aims to spread risk across a variety of investments in order to reduce the impact of any one investment on the overall portfolio. Investment management firms that follow a diversified portfolio approach typically offer a range of products and may use various tactics, such as asset allocation, to help manage risk.
While concentrated and diversified portfolio approaches are two broad approaches to investing, it is important to note that they are not mutually exclusive and many investment management firms offer both concentrated and diversified products to their clients. In addition, the competitive landscape in the investment management industry includes other factors beyond just concentrated vs. diversified portfolios, such as the range of products and services offered, the target market, pricing strategies, and marketing and sales tactics.
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Q: Are you aware that concentration involves a selection process that is part of Active investing?
A: Yes, concentration is often associated with active investing because it involves the selection and management of a smaller number of securities with the aim of outperforming a benchmark index or achieving a specific investment goal. Investment management firms that follow a concentrated portfolio approach typically believe that a smaller number of high-quality securities can provide better risk-adjusted returns than a more diversified portfolio. This approach requires a high level of research and analysis to identify the best investments and may involve more active management of the portfolio.
However, it is important to note that concentration is not limited to active investing and can also be used in a passive investing approach. For example, an index fund that tracks a concentrated index, such as a small-cap index, may be considered a concentrated portfolio even though it is passively managed. In this case, the portfolio would be concentrated in a smaller number of securities within a specific market segment, such as small-cap stocks.
In general, the choice between a concentrated or diversified portfolio depends on the investment goals and risk tolerance of the investor, as well as the overall market conditions and economic environment. Investment management firms may offer both concentrated and diversified products to their clients, and may use various tactics, such as asset allocation, to help manage risk in a diversified portfolio.
Q: Are you aware that broad indexes used by the industry are predominantly concentrated and drive the passive investing industry??
A: Yes, it is true that many broad market indices, such as the S&P 500 or the MSCI World Index, are concentrated in a relatively small number of securities compared to the overall universe of investable securities. These indices are often used as the basis for index funds and ETFs that track the performance of the underlying index.
However, it is important to note that not all indices are concentrated and there are many indices that track specific market segments or asset classes that may be more diversified. For example, an index that tracks small-cap stocks or emerging markets may be considered more concentrated than an index that tracks the overall stock market. In addition, there are also indices that track specific strategies or themes, such as socially responsible investing or low volatility, that may be more diversified.
Q: Are you aware that small cap stocks Index can be considered more factor based Active investing than broad market based passive investing?
A: Yes, it is true that small-cap stocks can be considered more factor-based than broad market indices, such as the S&P 500 or the MSCI World Index, which are typically composed of larger, more established companies. Small-cap stocks tend to be more volatile and less liquid than large-cap stocks, and may be more influenced by specific factors, such as earnings growth or valuation. As a result, an index that tracks small-cap stocks may be considered more factor-based than a broad market index.
However, it is important to note that the classification of an index as "factor-based" or "passive" is not always clear-cut. Some indices that track specific market segments or asset classes, such as small-cap stocks or emerging markets, may be considered more factor-based because they are more concentrated in a specific segment of the market and may be more influenced by specific factors. At the same time, these indices may also be used as the basis for index funds and ETFs that follow a passive investment approach, in which the portfolio is designed to replicate the performance of the underlying index.
Q: Do you know the 80-20 rule? If yes, then would you agree that 80% of the Passive investment money is in instruments using broad market indexes rather than small cap indexes?
The 80-20 rule, also known as the Pareto principle, is a principle that states that roughly 80% of the effects come from 20% of the causes. In the context of investing, the 80-20 rule might suggest that a small number of securities or factors drive the majority of the returns in a portfolio.
It is difficult to say definitively whether or not 80% of passive investment money is in instruments using broad market indices rather than small-cap indices, as it would depend on the specific data sources and definitions used. However, it is likely that a significant portion of passive investment money is invested in broad market indices, such as the S&P 500 or the MSCI World Index, which are widely followed and used as the basis for many index funds and ETFs. At the same time, there is also a significant amount of passive investment money that is invested in more specialized indices, such as small-cap indices or indices that track specific market segments or strategies.
Q: Would you agree that Passive-Active-Concentrated-Diversified is a reasonable way to define the competitive landscape for the investment management industry?
A: Passive, active, concentrated, and diversified are all terms that can be used to describe different approaches to investing and can be useful for analyzing the competitive landscape in the investment management industry.
Passive investing involves tracking the performance of a specific index or benchmark and investing in a portfolio that is designed to replicate the index's performance, while active investing involves actively selecting and managing a portfolio of securities with the aim of outperforming a benchmark index or achieving a specific investment goal.
Concentrated and diversified portfolio approaches refer to the number of securities in a portfolio and the degree of diversification. A concentrated portfolio is one that is focused on a smaller number of securities, typically 20 or fewer, while a diversified portfolio is one that is spread across a wider range of securities and asset classes.
While passive, active, concentrated, and diversified are useful terms for describing different approaches to investing, it is important to note that they are not mutually exclusive and many investment management firms offer a mix of these approaches to meet the needs of their clients. In addition, the competitive landscape in the investment management industry includes other factors beyond just these approaches, such as the range of products and services offered, the target market, pricing strategies, and marketing and sales tactics.
Q: Would you agree that Active investing solutions are more expensive than Passive investing solutions?
In general, active investing solutions tend to be more expensive than passive investing solutions. This is because active investing typically involves a more resource-intensive process for selecting and managing securities, which can lead to higher fees for investors.
Active investment management firms typically charge higher fees than passive investment management firms because they believe that their research and analysis will lead to outperformance compared to a benchmark index. These fees can take the form of asset-based fees, such as an annual management fee or an expense ratio, or performance-based fees, such as a percentage of the outperformance relative to the benchmark.
On the other hand, passive investment management firms typically charge lower fees because they do not engage in the same level of research and analysis as active firms. Passive investment products, such as index funds and ETFs, typically have lower expense ratios and may not charge performance-based fees because they aim to replicate the performance of the underlying index rather than trying to outperform it.
Q: Do you know of any Active managers (individuals or institutions) in U.S.A who have delivered more than 10.5% annualized returns over 55 years?
It is difficult to identify specific active managers who have consistently delivered returns in excess of 10.5% over a 55-year period, as the performance of any particular investment product, whether it is actively managed or passively managed, depends on a variety of factors, including the specific investments held in the portfolio, the investment goals and risk tolerance of the investor, and the overall market conditions and economic environment.
In addition, it is important to note that the performance of any particular investment product should not be used as the sole basis for making investment decisions. Past performance is not necessarily indicative of future results, and it is important for investors to consider their own investment goals and risk tolerance when making decisions about where to allocate their assets.
It is also worth noting that the S&P 500 is a broad market index that tracks the performance of 500 large-cap companies listed on the New York Stock Exchange and NASDAQ. The performance of the S&P 500 reflects the overall performance of the U.S. stock market and includes both price appreciation and dividends. As a result, it may be difficult for any particular active manager to consistently outperform the S&P 500 over a long period of time.
AlphaBlock Team
AlphaBlock is MIT Fintech award winning, smart beta wealth tech company that services global institutional investors, and advisors through Electronic Investment Funds (EIFs), a better alternative to ETFs. EIFs are offered at zero fees, charge only for alpha, and are based on the company’s diversified, Nasdaq validated Indexes.