Can a New Index Help Fundsters Re-Evaluate Gross, Not Net, Flows?
Reported by Neil Anderson, Managing Editor
When fundsters and industry consultants talk about mutual fund flows, they focus on net numbers to see how (independent of performance) funds or firms are growing. Yet ReFlow is offering fund firms a new tool to instead examine gross flows. Yesterday the San Francisco-based shareholder-flows-specialists unveiled the ReFlow Fund Flow Volatility Index (FLIX), which measures gross flows as percentage of average AUM (expressed in bps) for non-money-market, non-ETF funds. The FLIX index pairs with a "flow barometer," which tracks "the ratio of inflows to outflows."
Paul Schaeffer, president of ReFlow, put the launch of the new index in the context of recent market woes.
"Last month's 'flash crash' only heightened concerns about market stability and potential gaming of orders in an era of high-speed trading, fragmented markets, and rising trade volumes," Schaeffer stated. "Even though the FLIX index reflects an easing of flow volatility since the extraordinarily high levels we saw in 2008 and 2009, broader industry trends suggest that flows could remain substantially more volatile than they have been in the past."
Company Press Release
SAN FRANCISCO, July 7, 2010— ReFlow Management Co., LLC, today announced introduction of the ReFlow Fund Flow Volatility Index (FLIX Index), designed to help mutual fund managers better understand fluctuating asset flows and their impacts on fund performance. ReFlow is a global provider of mutual fund liquidity and performance tools.
Monthly FLIX data is published on www.reflow.com/flix.
“The FLIX Index aims to fill a gap in regularly published industry flow data, which historically has focused on net asset flows,” said Paul Schaeffer, president of ReFlow. “While net flow data are important from an asset-gathering standpoint, an understanding of gross flows is necessary for funds that want to manage the disruptive effects of large redemptions or subscriptions on portfolio strategies, cash positions, and fund expenses.”
The monthly FLIX Index measures gross flows of long-term mutual funds as a percentage of average assets under management, expressed in basis points. A related FLIX Flow Barometer charts the ratio of inflows to outflows as an indicator of investor sentiment regarding mutual funds. Based on analysis of data published by the Investment Company Institute (ICI) in its regular publication, Monthly Trends in Mutual Fund Investing, the FLIX Index covers all open-end, long-term mutual funds excluding money market funds and ETFs.
The May 2010 FLIX Index rose to 616, the highest level since March 2009 and a 15.4% increase over April 2010. The increase in volatility reflected a surge of redemptions during the month, reversing the pattern of sales-driven flows that prevailed over the past year. The FLIX Flow Barometer fell to -4.7%, registering the largest month-to-month drop in the past five years and the first negative value in 14 months.
Taxable bond funds saw an especially sharp increase in flow volatility driven by the combination of record sales and an upswing in redemptions. The FLIX Index for bond funds rose to 878 in May, a 23.7% increase from the previous month’s value of 710. Simultaneously strong sales and redemptions pushed gross flows among taxable bond funds to $169 billion in May, the highest level on record, eclipsing even the $151 million in gross flows reported in October 2008 at the height of the financial crisis. While net flows remained positive, higher redemptions pushed the Bond Fund Flow Barometer down to 15.3%, substantially lower than the 50%-plus levels seen over most of the past year.
The FLIX Index for equity funds climbed to 552 in May, up from 476 the previous month. A wave of redemptions pushed the Flow Barometer for equity funds into negative territory, with outflows exceeding inflows by 16.3%.
(Full current FLIX Index data can be downloaded from www.reflow.com/flix/monthly.pdf.)
While fund managers generally see inflows as positive and outflows as negative, both subscriptions and redemptions may undercut fund performance and distort portfolio strategies by driving managers to make trades and go to market under conditions they would not otherwise choose, explained Paul Schaeffer. “Mutual fund performance suffers from the built-in conflict between long-term investment strategies and short-term liquidity demands,” he said.
This problem is worsened by the upswing in market volatility in recent years, which not only spurs investors to move assets but heightens the risk of adverse pricing for fund managers who are driven to market by large asset flows, added Schaeffer. “Last month’s ‘flash crash’ only heightened concerns about market stability and potential gaming of orders in an era of high-speed trading, fragmented markets, and rising trade volumes. More than ever, portfolio managers and traders have compelling reasons to pay attention to patterns of shareholder flow,” he said.
Schaeffer cited a variety of demographic forces and fund distribution trends as contributing to a long-term rise in asset flow volatility.
- The dominance of no-load funds, which lower the costs of switching funds and thus tend to reduce fund holding periods
- An increase in asset rollovers and withdrawals as growing numbers of Baby Boomers retire.
- The growing popularity of fee-only advisors who add value to client accounts by continually adapting asset allocation and not tied to particular fund families.
- The rise of wealth management platforms which centralize management of hundreds or thousands of accounts, increasing the “lumpiness” of flows.
ReFlow’s findings on the forces affecting flow volatility were re-summarized in a November, 2009, whitepaper, “How Mutual Fund Ownership and Distribution Are Changing—and What That Means for Fund Performance,” downloadable from http://www.reflow.com/rethink/whitepaper.pdf
“Even though the FLIX index reflects an easing of flow volatility since the extraordinarily high levels we saw in 2008 and 2009, broader industry trends suggest that flows could remain substantially more volatile than they have been in the past,” concluded Schaeffer.
Founded in 2002, ReFlow provides U.S. mutual funds and European investment funds (UCITS) with tools for managing the impacts of shareholder flows. The firm is headquartered in San Francisco with an office in Luxembourg. Its solutions have been approved by the boards of 24 fund families, representing $402 billion in assets, for use by 463 funds.
For more information about ReFlow, please visit www.reflow.com