A former fund company president is betting that investors will embrace the ability to predetermine the return on an investment and achieving that return via an online auction site that would pit anonymous investor/bidders against each other with the highest bidder being victorious.
That's the thinking behind an innovative financial services business methodology that the U.S. Patent and Trademark Office granted on Nov. 14 to Gene Podsiadlo, a partner with Financial Foundry, a private product development company in Princeton, N.J. Podsiadlo is the former president and managing director of the New York-based Warburg Pincus Funds, which was acquired by Credit Suisse Asset Management, also of New York, in 1999.
Leveraging the "BidFund" auction concept, Podsiadlo registered a closed-end fund, the BidFund 2 Percent Fund, with the Securities and Exchange Commission in September 2002. The fund was registered two years after the original patent application had been filed. But Podsiadlo pulled the plug on the fund, still in shelf registration earlier this year, deciding that a joint venture partnership or licensing arrangement with a large institution would be better to pursue.
"It didn't make sense to launch before the patent [was granted]" he said. "Getting a patent makes the viability of the commercialization more real," he added.
The patent was officially issued on Podsiadlo's concept for a "communication network based system and method for auctioning shares of an investment product." In a nutshell, the idea involves creating a remotely accessible system, such as an Internet website, for auctioning shares of a pooled investment or open- or closed-end mutual fund, for a winning bidder to be determined. An institution, such as an asset manager, fund sponsor, investment bank or other financial services provider, would determine an ending net asset value for a pool of assets and a time frame for investing. Then, the firm would allow qualified bidders to log into an auction website and input a bid for that ending net asset value. However the institution originally invested its assets to get to that ending net asset value is incidental, Podsiadlo explained.
For example, an auction for a predetermined net asset value of $10 per share might invite clients to begin bidding at a minimum of $9.80, with the highest bidder winning that particular auction. A bidder/investor with a winning bid of $9.81 would be locking in a predetermined return of 2%, Podsiadlo explained. The winner would then redeem his or her full investment amount at the predetermined $10 net asset value, on the preset redemption date. Losing bidders would not lose anything, and could participate in future auctions.
Sponsors would determine specifics such as offering daily, weekly or monthly auctions, and parameters for those who would qualify to participate, such as clients with a money fund account of $100,000 or more. This model, which could be licensed, could take a variety of forms, Podsiadlo said. But the real draw would be for an organization to see this as a "totally unique and proprietary product to offer as an attraction device," he said. "This is about innovation and creating a product that is consumer-friendly."
The investment auction dynamic, through which an investor could determine in advance what return would be received, is the polar opposite of the current process whereby investors "invest their money and are immediately exposed to investment risk," Podsiadlo noted in his patent application. Under the auction scenario, investors will know that their return will be "mathematically positive" and that the "risk to the investor's investment principal is primarily limited to the opportunity cost of placing a hold on the investor's capital during the auction itself."
Although the investment auction system may play well to institutional investors, Main Street investors may reject it.
"I think it is too complex for the ordinary investor," said Michael Sompura, director of investments for The Householder Group, a national financial planning firm headquartered in Scottsdale, Ariz. In addition, there could be a host of administrative challenges if this were imbedded into an open-end mutual fund, he said.
Patents are not new to the financial services industry. Many patents for a variety of financial services systems and methodologies, as well as unique investment processes, are granted each year and can boost marketability.
"It gives the patent holder a head start on something and restricts the competition," said Roger Ibbotson, a professor at the Yale School of Management and an advisor to both Morningstar of Chicago and its wholly owned subsidiary that bears his name, Ibbotson Associates. "I think it gives a marketing edge," he added. This past October, Ibbotson, the firm, was granted a patent for a system that creates an optimal asset allocation for investors to generate income during retirement.
"There is some inherent value in having a patent and being able to exclude others," said Griff Griffin, a patent attorney in the Atlanta office of Sutherland Asbill & Brennan who focuses on business method patents and financial services products. Patents not only protect innovations but increase the value of a company that owns them.
In April 2005, Man Investments of London applied for a patent for a U.S. hedge fund structure that allows tax-exempt investors to invest. That patent is still pending, noted a company spokesman.
In 1998, a high profile court challenge by State Street Bank & Trust to a patent granted to Signature Financial Group in March 1993 for the now-famous "hub and spoke" fund structure was decided in Signature's favor.
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