Investment newsletters have just about been around as long as there has been a stock market. Although it is hard to believe, pre-Internet they were actually printed out, stuffed into envelopes and mailed to subscribers. Investors then needed to trade (or not) the recommendations of the adviser. One can see that there is both a time gap and potential execution gap.
As before, in the Internet age there is no shortage of advisers publishing investment recommendations. However no on the web those time lags from recommendation to potential trade have shrunk to nearly zero. Up until recently there remained an gap in the execution cycle for newsletter subscribers. (Of course, prior to the Internet there have been investment advisers to both published a newsletter and managed money.)
There now exists a new service that is closing the loop between recommendation and execution, thereby closing those gaps were mentioned. The investing site Covestor.com has launched Covestor Investment Management (CVIM). The goal being to allow investors to invest alongside professional and amateur investors in a multi-account setting. You can read the press release that explains the service in detail.
Venture capitalist and Covestor investor Fred Wilson at A VC describes the services as “a new and different approach to investment management.” One that will presumably empower individuals to both put forth their investment ideas and allow them to take advantage of others’ investing insights.
Erick Schonfeld at TechCrunch reports on the launch and this entire personal investing space. He notes that Covestor is really in investment data business. The services works by licensing the portfolios of investors and translating that into actual trading decisions. In closing he writes:
I like the fact that Covestor is leveling the playing field for smart investors to virtually manage funds and compete with the institutional establishment.
Zack Miller at New Rules of Investing has been on this trend of a flatter, more open investing environment for some time. Zack notes there has always been some controversy as to why investment bloggers would write for public consumption. Now the picture is beginning to clear:
Covestor has provided the business model behind blogging for financial professionals.
David Enke at Bull Bear Trader likes how CVIM will allow start-up managers a forum to “prove themselves” and make a few bucks in the process. However he notes there are some legitimate questions about how trades will be made and what impact they may have.
Mebane Faber at World Beta is somewhat surprised the enterprise received regulatory approval. Mebane notes that while CVIM may be a decent option for small investment advisers there is always a risk that end-investors will not thrive in this system as they chase investment returns of the “hot hand.”
At the moment it seems like the current CVIM managers are focused on the equity markets. We wonder if a bond strategy will eventually be added. One would guess that it would have to be based on ETFs. In addition, it seems that any strategies that are option-related would be problematic to implement.
Another issue is that fee structure. The current structure of paying advisers a fixed dollar fees per subscriber is beneficial to advisers for smaller accounts. Which we assume the multi-manager structure is built for. However at larger account sizes the benefits will flow more towards CVIM with its more traditional, annual fee based on a percentage of assets.
We are admittedly intrigued by the Covestor business model. Only time will tell whether they are able to both attract managers who are able to outperform the market and whether individual investors will flock to the platform. While there are some questions still to be answered, one question is answered: how do you close the loop between investment newsletter and an actual portfolio?