Why you shouldn't judge mutual fund firms by flows and AUM

Research finds market share and changes in market share provide better indications of companies' business performance

Why you shouldn't judge mutual fund firms by flows and AUM

Investment-fund firms are often evaluated and ranked based on growth in their AUM and net inflows, but that may not be the best measure of their success.

That’s the premise advanced by Jan Jaap Hazenberg, PhD and head of product strategy at NN Investment Partners, in a recent paper titled A New Framework for Analyzing Market Share Dynamics among Fund Families published in the Financial Analysts Journal.

As explained in a recent blog post, his framework determines mutual fund firm success by looking at the drivers of changes in a company’s market share, and pinpoints whether the company outperformed and outsold funds in the same categories. The framework also looks into whether a company benefited from a “rising tide” of favourable fund flows or performance in certain categories its fund range is exposed to.

“[C]hanges in market share in a given period are driven not only by investors buying and selling mutual fund units, but also by the investment performance of the existing assets since the period began,” Hazenberg said in the piece published by the CFA Institute. “A fund gains market share when the sum of its returns and relative flows — net flows as a percentage of the fund AUM at the start of the period — is greater than that of the market’s.”

Aiming for a more accurate measure of a fund company’s business performance, Hazenberg’s framework dissected changes in a company’s market share into four explanatory components:

  • Category performance, which is driven by the investment performance of fund categories the company is active in, relative to the market average;
  • Excess performance, measured by how the company’s funds did compared to competing funds in the same category;
  • Category flows, which depend on net flows of fund categories where the fund firm is active, relative to the market average; and
  • Excess flows, which look at how much a fund company outsells its category peers.

To determine whether the framework would create an alternative cartography of the current landscape of mutual fund companies, Hazenberg analyzed U.S. mutual-fund data covering the period from 2001 to 2018, which included 15,242 funds across 1,428 fund companies.

Over the 18-year period, he found that roughly 42% of market share changed hands among fund companies, discounting shifts due to mutual fund firm mergers and acquisitions. Individual companies scored very differently on each of the four components, with excess flows having the largest impact.

Hazenberg found that the negative impact of a particular component tends to be persistent; a loss of market share in total or on one specific component for one period tends to be followed by a similar negative outcome in the succeeding period.

“The longer the time period over which market change was analyzed, the more the two flow-driven components dominated the performance-driven components,” he said, noting that flows tend to persist more than performance. He warned, however, that fund companies shouldn’t take that as a signal to ignore performance for the sake of boosting marketing and sales.

“Past fund performance and past category performance are both significant drivers of change in market share,” he said.


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