4 Reasons it Pays to Know Your Flows

Performance is important, but so too is sentiment. Knowing your flows will tell you all that and more 

Catherine Elliott 1 December, 2021 | 11:01AM
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Monitoring the overall performance of investments is important. But so is paying close attention to asset or fund flows, the net movement of cash into and out of investment vehicles like mutual funds and exchange-traded funds (ETFs).

Asset managers have been looking at fund flows for many years to track how different products perform in different markets. In recent years, improved analysis techniques have made it easier to determine the various factors affecting flows and help explain why money is moving where it is. What’s more, predictive analysis techniques have made it possible to pinpoint where money is likely to go in the future, too.

The benefits of asset flow analysis are numerous. Here are some of the key ways in which looking closely at flows can aid investment decisions.

It Helps to Know Investor Sentiment

Fund flows can help to determine investor sentiment for particular funds, for particular managers,   and for asset classes in general. Higher inflows are reflective of greater investor optimism and conversely, outflows are a key indicator of wariness.

Asset managers can also see which asset classes in their line-up are doing well in terms of attracting money, which are doing poorly, where the gaps are in their competitive set and the industry, areas that it’s more difficult to compete for assets, and where the market microstructure resembles a monopoly structure.

Know the Flow? You Can Spot The Trend

As well as looking at information on individual funds, it’s easy to group fund data together

into a wide variety of categories. Funds are regularly grouped by asset class, region of investment, domicile, where they are available for sale, vehicle type, cost, and whether they are managed actively or passively.

Summing up flows into categories consisting of funds with the same characteristics and tracking these categories’ popularity over time gives an indication of how investor preferences have been changing and can also help predict where they’re likely to go in the future.

For example, flows into sustainable funds have been on the increase in the last several years, reflecting an overall demand for sustainable investing vehicles as investors become more aware of the environmental implications of their decisions.

They Really Inform Fund Launches

Asset flows can be very useful in helping managers decide where to focus their marketing efforts or in which areas to launch new funds.

For example, in a monopoly situations, a single fund might gain 90% of the assets invested in a particular category. Flows analysis shows that if a firm has a monopolist position in a particular category, then launching a new fund in that category could result in them gaining further assets much more quickly than their competitors.

Know Your Flow, Know Your Peers

Peer analysis is a key reason for looking at fund flows. Morningstar has developed models that are able to forecast when a fund is likely to be merged or closed down entirely, events that would trigger a shake-out of assets. Such episodes can be a great opportunity for managers to come in and try to capture the assets that are going to become available for investment elsewhere, especially if they can predict when that is likely to happen.

Morningstar has recently launched a new Asset Flows Forecast feature within our flagship research and analysis platform, Morningstar Direct, which provides a comprehensive understanding of flows data and the key factors influencing those flows.

To find out more about the importance of fund flows and the relevant solutions from Morningstar, you can download our Guide to Asset Flows for free here.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Catherine Elliott  is a content writer at Morningstar