Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Fund Complexes Eye Folio Technology


Stock baskets, or groupings of stocks picked by individual investors, have been long derided as competitors to the mutual fund industry. Jim O'Shaughnessy, who headed the now-defunct Netfolio, is rethinking that idea.

Despite the fact that the division of his company that offered such products shut down earlier this month, O'Shaughnessy says stock baskets can not only coexist peacefully with mutual funds, but will become known as providers of vital technology platforms that will enhance the industry.

His company, launched only a year ago, lost out on a second round of venture capital funding this year and its technology will now be sold off. A group of four bidders will likely vie for the product at auction, although O'Shaughnessy won't say who they are.

Leveraging Technology

What is certain is that, after the investment products, the public relations and the hype about stock baskets is stripped away, as it has been at Netfolio, all that remains is the technology. And that, O'Shaughnessy says, is a sound enough product, not only to keep the concept of stock baskets alive, but to demonstrate that the idea can generate revenue at a time when companies can't afford to burn cash on new concepts.

O'Shaughnessy and others say the platforms will likely be absorbed into major fund complexes and will be used for a plethora of purposes, including to provide investors the option of developing their own stock baskets.

"I think properly funded and properly deployed, the technology still has the capacity to be a category killer," he said. "It's just a better mousetrap. Offer the better mousetrap, you're going to sell a lot of mousetraps. Once the large institution embraces personal funds, it's going to be a very different landscape.

"Maybe we and Foliofn and others will be remembered as the people who pioneered the technology," he continued. "This will be a ubiquitous technology in three years and you will be able to get a stock basket at every brokerage. Larger institutions are going to be able to take advantage of the technology we made by purchasing it from us."

Netfolio's technology connects investors via the Web with the ability to research securities as well as investment strategies weighed against issues of diversification and volatility. An investor can discard stocks and choose new ones with a few mouse clicks.

Rethinking Technology

But in hindsight, O'Shaughnessy says the technology proved a tad too advanced for the average user, as demonstrated by the surprising number of high-net-worth clients Netfolio attracted. Now, he says, the technology may be best used in the hands of financial professionals who are more adept.

Indeed, the upcoming sale of the Netfolio technology platform comes on the heels of several deals at the company's key competitor, Foliofn, which announced in August that Brinker Capital will use Foliofn's platform to handle back-office trading, custody and accounting for managed accounts. Foliofn also got funding in February from Advent Software, an investment technology firm.

A stubbornly volatile economy has contributed to the notion that these pioneers of the stock basket concept can make revenue, and help fund complex mainstays make revenue, by licensing their unique software platforms.

Rich Hagen, VP of retail at Foliofn, said his firm has been hurt by the economic downturn, a climate in which individual investors are leery of managing their own portfolios, with or without the help of educational tools.

But the poor economy "has helped us with the potential partners who, because of the turn in (economy) have been less interested in building platforms internally," he said.

Fund consultant Geoffrey Bobroff suggests larger complexes will indeed snap up the stock basket technology. And if that happens, he says O'Shaghnessy and Foliofn will be remembered, not so much for their revolutionary product, but the software that drives it.

"The expected success is not going to come from the individual investor, but the institutional use of the electronic tools they've built," he said.