Podcast 16th October 2015
Bought a car lately or known someone who bought a car? If you share your experience in buying a new car, it will be similar to every other person who bought a car. You choose from a range of similar model cars produced by a range of automakers. You check out reviews, test drive, check with friends and then choose the car. In all probability, the car you choose may not be any different from other cars on offer.
Given cars are commodities, it makes sense to choose the car that is easiest to maintain i.e. convenience of service centers. In order to compete, each automaker look to release new models that will grow their sales. A new model energizes the sales force and the dealership and that initially leads to higher sales.
Shopping for a car is similar experience to shopping for a mutual fund. You choose from a range of similar products, check performance, reviews and take advise from your advisor. You finally choose a fund that you find is easiest to invest in and track. In all probability the fund you choose may not be very different for the other funds on offer.
Mutual funds schemes have largely become commoditized and it makes sense to invest in a fund that is seen as safe and sound. Mutual funds then launch NFO’s (New Fund Offers) to grow assets as it energizes the sales force and distributors. This then leads to more funds of similar characteristics that further commoditize the fund industry.
In a commoditized world what survives and grows? A true differentiator is what survives and grows. In the auto world, companies like Ferrari or Tesla that offer markedly superior and differentiated cars are clearly different from all other auto manufacturers. Ferrari is coming out with an IPO that is likely to see strong demand while Tesla is the highest valued car company in the world.
The recent Volkswagen emission issue has further hurt the prospects of commoditized automakers as all cars as seen as the same.
Mutual Funds too face the problem of surviving and growing in a commoditized world. Hedge funds came and provided the differentiator and that industry grew in the 2000 to 2010 decade but then even Hedge Funds became commoditized. Now money is flowing into private equity as the unlisted space is seen as offering the best returns for investors.
The future for both auto and mutual fund industry is becoming more uncertain. Who will survive and grow in a largely commoditized industry? Will the big get bigger or will size pull them down? Or will it be the likes of Tesla and Ferrari in auto or private equity funds that gain the most? The latter is the answer and the auto and mutual fund industry will have to really change their way of thinking in order to survive and grow.
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