Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-06-24
2002-01-08
Downs, Robert W. (Department: 2164)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
Reexamination Certificate
active
06338047
ABSTRACT:
BACKGROUND OF THE INVENTION
1. Field of the Invention
The present invention relates generally to methods and systems for creating a collection of securities for investment purposes. More specifically, the present invention relates to creation of a fund, including, but not limited to, specifically a registered open-end investment company (a “mutual fund”), or a portfolio of directly-owned securities owned by an investor or a group of investors (such as an investment club) or managed by an adviser, where the preferences of the fund's or portfolio's own shareholders, or the participating investors, are utilized in selecting the securities and the portfolios of investments to be owned by the fund or to be included in the portfolio.
2. Background Art
Currently, investors have a few basic choices in terms of investing their money. They can manage their money themselves, or they can have someone else manage it for them. If they manage it themselves, they can obtain information from a variety of sources, including financial planners and advisers, brokers, and printed, on-line, or other materials. These sources allow investors managing their own money to do so with more or less specific information and advice provided to them. By investing in this manner, an investor retains the discretion to accept or reject the advice, and the investor makes the final investment decision.
In contrast, an investor can have someone else manage the investor's money for the investor, either by providing discretionary authority to a money manager or broker in an individual brokerage or other account managed for a specific investor, or by investing in a vehicle such as a mutual fund, a hedge fund, or some other collective investment vehicle.
An investor who is a member of an investment club can have her investments managed in part by collective action by the members of the club where the members vote for the stocks to be purchased by the club. Those member actions are undertaken usually in meetings of the club, or occasionally on-line through e-mail or otherwise. They involve the collective selection of an investment, as opposed to the selection of investments that reflect aggregated, individual actions, even though, once selected, the investments, in both cases are held in a collective investment vehicle for all the investors. Put another way, in a typical managed mutual fund, investments are selected by a single or few money managers who determine the investments for all investors in the fund; in an investment club investments are selected by the collective action (such as by voting or by designating a manager) of the relatively few members of the club, and investors must become members of the club by collective action.
The above-mentioned related patent applications describe inventions that allow smaller investors, through the alternative of a direct stock ownership system, to create portfolios that uniquely provide both the advantages of a mutual fund and of direct stock ownership. Using those inventions, a smaller investor can provide discretion to another, such as a financial planner or a money manager, to create and manage a portfolio of stocks for the smaller investor that is directly-owned by the investor. In that way, the smaller investor can obtain the benefits of “active management”—the benefits of having a professional manager make investment decisions to select the securities to be held in an investor's portfolio—while also maintaining the benefits of direct stock ownership.
The benefits of active management are generally among the benefits that many investors seek in an actively managed mutual fund where a professional fund manager—the fund adviser—makes the active investment decisions for the fund as a whole. A smaller investor can also use the inventions described in the related applications to track a securities index, or an industry sector, using various selection criteria, thereby mimicking passively managed mutual funds like index funds. The above-mentioned related applications also describe a collaborative filtering technique that assists in the selection of securities to be included in the investor's portfolio by allowing investors to choose to follow the selections of a selected group of investors. The above-mentioned related applications also describe a means to create a portfolio for smaller investors that is limited by or satisfies certain parameters, such as minimum diversification and maximum security issue concentration, so as to be useful as a substitute in 401(k) or similar plans.
A frequently noted problem with actively-managed funds or professionally managed accounts is the so-called “herd” phenomenon. Professional managers of a mutual fund usually have styles, or the fund frequently has a “style”. For example, a fund could be a “growth” fund, seeking to invest in high growth stocks. Another fund may be an income fund, seeking to invest in high dividend stocks. When a stock is viewed as “growth,” the growth funds buy it, and similarly for other stocks and funds. Moreover, general trends in the economy are all followed by the same information sources, which report the same events and provide distribution means to the same commentators. Consequently, many professional managers hear and listen to the same things.
In addition, because many money managers are graded and reviewed based on how well they do relative to their peers, there is a tendency not to make investment choices that will be contrary to the decisions that one's peers will be making. It is better to try to be just slightly—but consistently—above average, than to run the risk of being a loser while trying to be a star. For these and other reasons, there is an observed phenomenon where the “smart” money follows the same investments, makes the same decisions, including the same mistakes, and usually performs less well, net of costs, on average than the market as a whole. The result is poorer performance from professionally-managed, actively-managed mutual funds than might otherwise be expected.
Under currently available offerings and the current art, an investor who does not wish to make his or her own investment decisions (or provide discretion to a broker or a money manager for an individualized account) can, very generally, either select to invest in a variety of passively-managed index funds or unit trusts, or select to invest in actively-managed mutual funds where the active management is supplied by a professional fund adviser. There is no way, however, for an investor to have a dynamic and changing actively-managed portfolio that reflects the aggregated, but individual, preferences of a plurality of investors, such as hundreds, thousands or millions of other people, and both as to the stocks in the portfolio and the proportion or weighting of the stocks in the portfolio.
Investing in an index fund is not the same. An index fund, like the S&P500 funds, invest in the “market” or some index and the fund increases or decreases in value depending on whether the “market” or the selected index rises or falls. At best, these funds reflect the investing public's preferences only to the degree the public's preferences are reflected in the upwards or downwards price of the specific stocks in the index and, therefore, in the fund—the investing public's preferences as to what should be held in the fund are irrelevant. An index fund does not vary in its weightings (except as the relative capitalization of the stocks themselves may change) or holdings (except when the index itself changes), and the holdings and the method of determining the weightings are dictated by those who specify the index (such as Standard & Poors, a division of McGraw Hill, for the S&P 500 funds). Even a fund that holds all of the stocks that are publicly traded will not have the weightings in the fund dictated by the preferences of investors, but by whether the stocks in the fund with the specific weightings chosen for the fund are increasing or decreasing in value.
Thus, the prior art does not provide
Akers Geoffrey
Downs Robert W.
FOLIOfn, Inc.
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