The Big Explainer
What are fund flows?
This week Roger Hirst is joined by Bob Jenkins, Refinitiv Lipper’s Global Head of Research, to talk about fund flows. Understanding fund flows can help us understand asset price performance, but first we need to know and understand how these fund flows are calculated.
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[00:00:00] 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.
[00:00:09] 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.
[00:01:00] 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.
[00:01:49] 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.
[00:01:56] 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.
[00:02:19] 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.
[00:02:30] 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.
[00:02:57] 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.
[00:03:05] 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.
[00:5:31] 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?
[00:5:44] 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.
[00:07:41] So how do people analyze fund flows and what sort of tools can be deployed?
[00:07:45] 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.
[00:08:51] 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.