Ford versus Starbucks - Uniqueness in money management, is it necessary?

The changes in the product mix and delivery of goods in the new economy are profound versus the old economy. The old economy was about scale and creating sameness to cut costs. Henry Ford did not care which car you bought as long as it was black. The new economy of Starbucks is all about offering unique experiences and customization. Of course, there always was product differentiation between these two extremes, but the operative behavior today is customization and uniqueness.

The era of money management customization can be measured by the number of mutual funds and ETF's available for investors. There are now over 9000 mutual funds not counting all share classes and 2000 ETFs as of the beginning of the year. For new specialized products like "smart beta", the number is closing in on a thousand.

Unfortunately, many of these funds are not unique but rather variations on same theme or benchmarks offered by different fund companies. Still, the era of customization is continuing. Classic Betrand competition leads to more competition in order to reduce price competition. Even in a winner-take-all environment differentiation exists to gain market share and maintain prices through slight differentiation. Everyone is special and wants something special and firms are trying to deliver on this desire to hold the line on price. 

There is no question that investor needs and risk preferences are often unique, and product customization can meet those specific needs; however, there are costs with creating uniqueness. On a micro level, customization will be more expensive so uniqueness will come at a price.  Additionally, it is not clear how to benchmark uniqueness. By definition it should behave like a general benchmark; consequently, it is hard to determine whether dispersion is good or bad. 

In hedge fund land, there are hundreds of managers who are all offering what may be the same risk premia. How many managers need to offer value or FX carry? How many trend-followers are needed? Each may offer a different return "experience" but are they really just replicating the same underlying alternative risk premia? The proof is in the uniqueness of returns, but the extra choice may not worth it.