Strategic Assessment #2: Identifying the Hype.

Can this new hype be a paradigm shift?

Are you willing to trust a newbie with your investments?

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How kaChing may shift mutual fund industry
James Temple, Chronicle Staff Writer
Wednesday, December 16, 2009

Investment advisory firm kaChing boasts heavyweight backers and an equally matched ambition: revolutionizing the $10 trillion mutual fund industry.

By leveraging the disruptive force of the Internet, the company's leaders argue they can provide everyday investors with the same advantages now reserved for the very rich.

The Palo Alto startup allows individuals to mimic the portfolios of successful money mangers, while providing a level of transparency, control and analytical tools more akin to personal wealth advisers than traditional mutual funds.

"Consumers deserve a better way to invest," said Andy Rachleff, chief executive of kaChing and the co-founder of Menlo Park venture capital firm Benchmark Capital.

KaChing will reveal additional support for that goal today, when it announces a $7.5 million funding round led by its Palo Alto neighbor, DAG Ventures. That's more than double the amount it's raised to date from Netscape Co-founder Marc Andreessen, Open Table chief executive Jeff Jordan and others.

But some warn the model is untested, the approach is inappropriate for many and the company's vision could well turn out to be less ambitious than naive.

"Will this kind of model attract enough money that someone will be able to sustain a business?" asked David Schehr, research director at Gartner. "That's pretty likely. Will they end the mutual fund industry as we know it in the next two to five years? No."

KaChing began as a Facebook application in 2007 that allowed users to create fantasy portfolios. This October, customers could begin plugging in real money and those who had established stellar track records, dubbed "geniuses," were able to collect commissions for investing on behalf of others.

Figuring out what constitutes investing brilliance is the purported secret sauce of kaChing. Most investors pick mutual funds based on risk tolerance and previous returns, but as every fund is required to point out: "Past performance does not guarantee future results."

Measuring consistency

In addition to recent performance, kaChing evaluates how consistently the individual stuck to their stated strategy and the quality of their investment rationale, as evaluated by the collective user response. KaChing feeds these results into a complicated algorithm that spits out an investment IQ. If they score at least 140 and enter a legal agreement to disclose their holdings and abide by professional standards, they are designated a genius.

Customers can synthesize the advice and pick their own stocks, or invest into portfolios that automatically mirror the selections of "geniuses." Participants are required to have at least $20,000 in liquid net worth and invest a minium of $3,000. Since late October, about 450 of kaChing's more than 425,000 users have invested real money, totaling around $4.5 million.

In contrast to the quarterly statements of most mutual funds, kaChing users can look at every trade their portfolio manager makes, analyze their performance and be alerted when they drift from their strategy.

With mutual funds, "by the time you find out what's owned, that information might already be defunct," said Andy Mathieson, managing member of Fairview Capital in Greenbrae. He's a college friend of Rachleff with a kaChing "genius" score of 142.

It creates a "never-ending cycle of buying high and selling low," as commission-hungry brokers push the funds that performed best in recent periods, he said.

Management fees

The average annual management fee on kaChing is 1.25 percent - of which 75 percent goes to the geniuses - with an additional 2 cent charge for every share traded. The company claims those rates are well below mutual fund industry averages when various hidden fees are taken into account.

The company's promises are intriguing, but worthy of scrutiny, observers caution.

The track record that established the majority of the 11 "geniuses" now on the site was limited to an anomalous, less than two-year period on Wall Street. Mutual fund fees actually vary widely from product to product. And there's no empirical basis yet to assert kaChing's algorithm is any better, or even as good, as standard Morningstar ratings.

For that matter, it's unclear how it compares to those of other companies pursuing similar models, like Covestor Inc. The New York firm began allowing clients to echo the portfolios of its money managers this summer, with a minimum investment of $10,000.

Investors today are justifiably frustrated with the ways of Wall Street, but they shouldn't be so eager to cast aside the old that they chuck caution with it, Schehr said.

"Try it with a small piece of your portfolio," he said. "Take it for a test drive, but don't buy the car yet."

E-mail James Temple at jtemple@sfchronicle.com.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/16/BUUR1B44OI.DTL
This article appeared on page D - 1 of the San Francisco Chronicle

Remember ... all that glitter is not gold. ...

Compass Rules of Strategy
One assesses the grand settings of their target by doing their own homework. They know their goal and their objectives by researching their target and its terrains. Then they perform due diligence by validating the data with two independent sources.

While the amateurs focused on the basic statistics and the number crunchers are playing with technicalities, the ultra professionals centered their attention on the grand picture by connecting the technicalities to the cycles of the targeted marketplace and the secular global connection to that arena.


Watch the tide, not the waves.
Regarding what funds or stocks that you are investing in, remember that the market will always have its level of volatility and sometimes the falls can be significant. If you are patient, ignore the ups and downs. Focus on the grand picture. Concentrate your time and attention on the long term goals and objectives.

The fundamentals of strategy never change. ... This is "The Dao of Strategy."

Final Thoughts

Only time can tell whether this new investment paradigm is tangible or 100% hype. Good luck to kaChing in their business venture.