Chapter 5 - Investor Management
IN THIS LESSON
How the Investment Landscape is Evolving
15 years ago, as Lehman closed its doors after 124 years in business, fund investors looked at the fragile financial systems and wondered how bad it would get. It turns out, bad. As a result of the US housing crisis that became a worldwide economic disaster, more than $1 trillion in wealth was lost.
While many of the “too big to fail” firms were bailed out, there were some that just weathered the storm of the Great Recession and a decade later they’re sitting on a more valuable portfolio. As a result of this fallout, investors have changed not only what they invest in, but how they invest as well. Many investors, unwilling to be indentured to a fund manager, are searching for low-cost alternatives to the big fees and commissions. The average risk profile has deteriorated as well with more money going into bond funds than stocks.
Bonding with Funds
Last year, stock investments nearly matched the dollar amount in 2007, prior to the Great Recession. However, bond funds continue to outpace stocks at a rate of nearly 3 to 1.
One of the primary drivers of this trend is that baby boomers are getting closer to retirement than they were a decade ago, so demand for the income that bonds generate has accelerated. But the mainstream investment community is still reticent to fully embrace the stock market despite a near record bull run. Bonds are safer and more stable and don’t carry the same risk of losing half their value as did many stocks during the financial crisis.
Active Decline
Before the Great Recession, fund managers were the rock stars of the financial world. They took massive profits, management fees, and commissions and were trusted implicitly to pick the winners and help investors beat the market. But many actively managed funds found themselves pulled down with the undertow of the financial crisis, as panicked markets punished stocks of all types, indiscriminately.
That soured many investors on actively managed funds. Instead, many moved their dollars into funds that were merely trying to match the S&P 500 and other indexes, rather than trying to beat them. Over the last decade, very few actively managed funds have been able to beat the performance of index funds after fees are considered.
Falling Fees
Put simply, investors are no longer willing to pay exorbitant fees. Becoming ever-more discriminant, investors are now looking for the cheapest alternative to traditional investing including online resources like Robinhood.
This makes sense given that having low fee investment management is one of the best predictors of success for a fund, said Mike Loewengart, Vice President of Investment Strategy at E-Trade, going on to say “From a number of perspectives, it’s hard to argue there’s been a better time to be engaged in the market, as spreads are tighter, expenses are lower, and technology is more powerful.”
But what about millennials? It’s no secret that this generation isn’t investing, but the why is slightly more complex. According to a recent Harris Poll, 40% of millennials feel they don’t have enough money to start investing in the stock market and they believe it takes a lot of money to get started.
On the other side, finance experts and fintech companies have been trying to demystify investing and expose simpler, low-cost ways to start building a portfolio. Roboadvisors like Wealthfront and Betterment offer low fees and will manage your investments—taking all your guesswork out of the process. Seedinvest allow anyone to invest in start-ups, Pre-IPO, real estate, and security tokens for as little as $100.
But moving in to 2019 we see several trends taking place:
Equity crowdfunding will change the landscape for underrepresented founders. The research findings are indisputable – diverse teams perform better. They create higher profitability, higher returns for investors, a faster pace to profitability and deliver overall better business performance and innovation.
Despite the mounting evidence and calls for progress, particularly in Silicon Valley, the prospects remain dire for minority founders seeking traditional start-up funding. In 2017, all-women founding teams received just 2% of the total pot of venture capital investments, while all-male teams received 79%. Average deal size for male and female founders also greatly differed, with woman-led companies receiving just over $5 million, while man-led companies received a little less than $12 million. The funding gap closely mirrors the diversity in venture capital, which is dominated by white, male Ivy-league grads. In the tech start-up world, where capital is used to fuel the hyper growth necessary to disrupt the establishment, venture capitalists play the kingmakers. It is a vicious circle where venture capitalists invest in similar founders, who (when successful) create tremendous wealth for the investors and themselves. Those founders then become the investors and the cycle continues.
Crowdfunding will continue to change the start-up landscape. Before crowdfunding became a legitimate and legal option, start-ups had two options; 1. Friends and family or 2. Venture/Angel funding. Both of which were heavily reliant on getting them to see your vision, traction, and a slew of other KPIs – because at the end of the day, 9/10 they don’t care about you or what you’re building; they care about a 10 X profit. Today, there are multiple ways in which a start-up can attract funding and one of the more common ways moving forward will be through equity crowdfunding.
But having more choices can be bittersweet. Hashing out a coherent fundraising strategy for multiple audiences can be paralyzing. Each platform requires a different, finely tuned approach. At the same time, there are rewards to be reaped: the ability to build and grow an enthusiastic fan-base, rally more support for your company, and get backing for ideas that would have been passed over otherwise.