Discussion of Omnibus Fund Structure and Asset Manager Market Share

managers reveal informed opinion on security values as clearly as trades do. Research cost is the same for both. If a manger neither buys nor sells, she tells us that she thinks the price is right. The critical variable is not trade volume, but percent of aggregate market cap controlled by asset managers collectively. The number of asset managers is much less critical. There must be enough for competition within each specialty or sector of investment. Too many is nota concern. Abler ones, on microeconomic principle, will displace the less able. That’s why Herbert Spencer taught that natural selection works the same in economics as in biology. A particular reason for preferring index ETFs as omnibus fund investments is for cheaper liquidity. The omnibus fund must compete with banks in accommodating payments and other withdrawals (redemptions). Popular index ETFs such as spiders (SPDRs, for Standard and Poor’s Depository Receipts) are bought and sold in seconds for a fee of a couple of basis points. So are Treasury ETFs. Thus the omnibus fund might do best not to include actual corporate bond ETFs in reintegrating the corporate sector. Treasuries of equal value should do about as well at much lower trading cost. Easy liquidity is essential. Why Omnibus? Omnibus means for everyone as well as of everything. It is all-inclusive either way. Individuals differ in risk tolerance. An omnibus fund provides for all. The portfolio of index exposures to riskier equity claims and safer debt claims is meant to satisfy average risk tolerance as a whole. Individual accounts then choose short-leg hedges or long-leg exposure or anything between. An omnibus portfolio best matches aggregate risk and return to individual claims on it. Other approaches would work too. A broad-based equity index fund, targeting say the S&P 500 or Russell 3000, could give the same tick-to-tick transparency in individual accounts. Hedging would still be available to cater to individual risk Chapter 8 Banks, Money and Macroeconomics 2/8/16 9 HOUSE_OVERSIGHT_011098