Fund flows tell the story of how investors
and advisers are behaving, reacting to what's
going on in the markets and the world around
them.
Welcome to the Big Explainer.
A wide variety of businesses use fund flows
to make investment decisions to help create
investment products or simply to try and decipher
what are the key drivers of the market.
Fund flows have always been one of the key
drivers of asset price performance, but over
the last few years, flows have arguably become
more relevant than fundamentals, especially
in the US, where the S&P 500 index continued
to rise despite profits having flatlined for
five years.
Understanding fund flows can help us understand
asset price performance, but first we need
to know and understand how these fund flows
are calculated.
We know fund flows are calculated on pretty
much any open-ended investment vehicle that
provides timely and accurate data as to the
total net assets under management and performance
that they've had over a given period.
That's essentially the calculation, we just
look at what are the assets under management
at the beginning of the period, say it's a
month, and what are the assets under management
at the end of the period?
Then we just kind of adjust or net out, if
you will, the actual performance of the underlying
securities, and whatever the differences,
those are your flows.
So I mean the flows are always an estimate,
no matter who does them, whether it's us or
some of our competitors out there, they're
always an estimate and they're more accurate
based on the accuracy of the information that
we get.
And so you'll see that more often than not,
flows that are designed to tell a story, if
you will, which is what they really do, they
do a wonderful job of.
The fund categories that are being analyzed
comprise a lot more than just well known mutual
funds.
There are many sources that can be used to
help build the big picture.
Well they are what you just said, the conventional
funds, their ETF and theyr’re money market
funds, those are the primary ones and really
across most of the major asset classes that
have tradable fund products built underneath
them, so that would be you know, stocks, bonds,
money markets, even commodities have a lot
of funds that are built around them nowadays.
The analysis of fund flows has many uses helping
to define product strategy for asset managers,
as well as helping investors spot how the
key investment themes are evolving.
You know, probably the most common users of
fund flows, ones who are really scrutinizing
these are your product strategy managers for
buyside shops in particular.
So this tells them what products in their
palette are doing well, where the trends are
going, what investors are interested in, how
they're doing against their competitors and
such, and it really gives them kind of that
roadmap for what did we do right back here
and what should we be doing going forward.
When looking at fund flows, we're not just
looking at absolute size, but also relative
changes in flows which are calculated on a
net basis.
They're inherently a net calculation at the
end of the day right.
You're netting out performance against total
net assets.
So essentially it's a net calculate on in
all instances.
In terms of which ones get the most, I mean
that really varies quite substantially and
therein lies kind of the intrigue and the
descriptiveness that flows can provide if
you're trying to tell a story about what's
going on macroeconomically, you know, how
does it, how is the world adjusting and dealing
with the pandemic?
We saw it very much in flows, and so for instance,
in your other question about size, where we're
looking at percentages or the absolute number,
quite frankly everything when you're doing
data analytics ends up being relative at the
end of the day, in my view.
But there are instances when that certain
that size number it can just hit you like
a block.
And for instance I'll say that during the
last month of March and going into April of
this year when the pandemic was really hitting
and the market was really cratering, we saw
one trillion dollars moving to US money markets
in a period of about three and a half weeks.
It was an immense record amount of money.
You don't need to know that that's less than
10 percent of total money market assets under
management because that may diminish it, but
that type of a move is very emblematic of
what's going on and how investors are feeling
at the time and how they reacted.
And by the way, that's an active product.
So typically people think of the market downturn.
People are selling out of active products
are going to pass the products.
Actually no, during our little downturn that
we had this past Q1, people sold out of passive
and they bought into active in a large way.
And they bought into again, larger money market
funds.
So we saw that it was at that sheer number.
Now that's come down quite a bit since.
And then we had a resurgence in bonds.
Bonds sold off during that kind of a pandemic
trough and then they bought back in again.
So we saw that nice surge back up and bonds
had very strong flows.
So really moves on a month to month basis,
which as the class has the most.
These are the three major asset classes of
course, they're always going to be, if you
will, jockeying for the top spot in terms
of flows, and it's really dependent upon what's
going on in the world, in the markets.
I told you I mentioned before about secular
trends we're seeing of investors generally
selling out of large cap, active equity products
in large developed markets and buying into
bond products.
That is a secular trend, and we saw it actually
continue mostly unabated during even the sell
off we had recently.
So you can see both short term trends and
long term trends playing out in flows.
And it really helps you understand what's
going on in the industry.
Central banks have been playing an increasingly
decisive role in financial markets.
Is there evidence that the expansion and contraction
of balance sheets such as the U.S. Federal
Reserves are having an impact on the speed
and size of flows?
There's kind of two things working here.
I think with the central bank intervention,
it definitely showed itself again in this
past Q1, a very interesting quarter of course.
We didn't see a lot of selling in equities
in Q1.
The markets collectively in terms of pricing
went down, but that was more of an institutional
story than a retail story.
Retail fund investors weren't selling out
of equities strangely.
They may have just been shell shocked by what
was going on.
However bond funds started to sell.
And this is the area where I told you there's
been a long term secular trend of inflows
into bond funds for many years now, largely,
again, because of an aging demographic, etc.
But they sold off.
And the problem with bond funds is once you
start selling, particularly ETF bond products,
you kind of break through that very high level
of liquidity in an ETF and you quickly get
into a kind of illiquid nature of a lot of
the bond sectors out there, except for, of
course, the US governments.
The rest of the bond sectors, particularly
in anything that's mid to lower quality, very
little liquidity, and they sold out instantly.
I mean we saw them kind of come right running
right back in as soon as the Fed put up that
immense backstop and essentially put up a
put, if you will, in particularly the credit
markets, if not the overall economy.
And that re-inspired investing back into bond
products almost overnight, literally overnight.
And you could see that happening with large
inflows in bonds in April, May and into June.
So you do see it both in a long term basis,
and a short term basis.
But long term also kind of offsetting the
immense amount of liquidity that's been going
on literally for the last 10 plus years now
is these trends that I mentioned before.
Aging demographics tend to buy income oriented
products, whether it be annuities, whether
they're putting keeping the money in their
pensions, what have you, all that seems to
keep a floor under bond prices in general.
And as soon as the rates go up a little bit,
people buy back into those, you have pension
funds which are looking to lock in their liabilities
and such.
And it creates that kind of floor, so despite
all the central bank intervention, we still
haven't seen like runaway inflation.
So how do people analyze fund flows and what
sort of tools can be deployed?
Well we provide flows in a number of different
formats.
We can provide feeds of flows to people.
We can provide flows via our desktop tools.
And we also provide flows via a brand new
fund flow tool that we have now on EIKON,
and we really have an incredible amount of
optionality in terms of how you slice and
dice it.
And that's also part of it, too as you combine
the flows that we have and we generate from
the vast amount of funds that we cover, some
300,000 plus across 60 some odd countries
in the world, and we segregate those into
our classification scheme.
Which is also the most granular that is out
there.
So you can really get a very meaningful like
for like pure comparison with your flows and
really understand how a given product's doing
relative to its primary competition.
And so that slicing and dicing is very important
and really expands the use case.
So again Refinitiv has a variety of different
ways you can access this through our Lipper
for investment management products, through
our EIKON products, through our feeds products
and gives you again that insight into the
flows, and you can then kind of manipulate
us as per your needs.
In many ways, fund flows are themselves the
story of the market.
We can see how demand for specific themes
may be rising or falling, and when combined
with price action fund flows can help inform
investors and product designers about the
potential longevity of a trend.
Over the last few years, the steady flow out
of active mandates into passive mandates has
been one of the biggest market stories in
which the fundamental investment framework
has been reshaped.
Many anticipate this trend will continue,
especially in a world of explicit central
bank intervention.
For investors and asset managers, there are
many micro trends that are taking place within
this framework.
Some such as ESG investing continue to build
momentum despite the skepticism.
Some of the best investors of the last few
decades have built successful careers by incorporating
fund flow models into their frameworks.
And regardless of the underlying drivers,
fund flow analysis will always be a valuable
tool that helps us to understand how financial
markets are evolving.
