How Do Fund Flows Affect Fund Performance?
A study by Morningstar acknowledges that the relationship between fund flow (or investors’ purchases and redemptions of mutual funds) and fund performance may be stronger than previously considered. However, the study based on three-year performance of stock-picking funds between 2006 and 2014 revealed that funds with high inflows, stood a lower chance of outperforming peers. Large-cap funds attracting most inflows had an average return of 7.8%. This compares unfavorably with funds with biggest outflows offering an average return of 8.1%. In many cases, outperformers tend to attract inflows. The strong rally may have run its course, leading to the tepid performance of those high inflow funds. Also, funds with massive inflows will have to employ the cash; otherwise the cash in net assets may swell and thus affect the fund’s allocation style. The positive on the other hand is that increased cash can help fund managers invest them in new stocks or financial instruments, without selling the existing portfolio. This in turn keeps the turnover ratio low. (To learn more about turnover ratio, click Does Turnover Ratio Influence Mutual Funds? ) Thus, fund flows may have an impact, but not necessarily in all cases. This is better explained in Pimco’s legal disclosures to the PIMCO Total Return Fund (MUTF: PTTAX ) investors. It says purchases or redemptions “may cause funds to make investment decisions at inopportune times or prices or miss attractive investment opportunities. Such transactions may also increase a fund’s transaction costs, accelerate the realization of taxable income if sales of securities resulted in gains, or otherwise cause a fund to perform differently than intended. While such risks may apply to funds of any size, such risks are heightened in funds with fewer assets under management.” Fund Category Performance with Highest Inflow & Outflow in August This year, the bleeding continues for funds and particularly for active funds. According to Morningstar data, open-end mutual funds saw outflows of $31.9 billion in August. Interestingly, not all fund categories that saw the largest outflows in August were in the red for August. Similarly, inflows did not necessarily mean that funds ended up in positive territory. Except for Europe stock funds, five fund categories that had the highest August inflows have posted year-to-date losses. In August, all these five categories finished in the negative zone. The magnitude of losses in August for categories with highest inflows was significantly larger than those categories that saw largest outflows. Categories with Highest Inflows in August ($ in Million) Total Return (%) August YTD August YTD Foreign Large Blend 11880 80302 -7.1 -0.8 Multi-alternative 1464 11145 -2.3 -1.3 Managed Futures 1122 6220 -2.7 -1.5 Global Real Estate 982 1644 -5.7 -4.5 Europe Stock 943 4218 -6.1 2.5 Categories with Highest Outflows in August ($ in Million) Total Return (%) August YTD August YTD Intermediate – Term Bond -6711 29175 -0.4 0.1 Large Value -3866 -22052 -6 -5.3 Multisector Bond -3484 1920 -1.1 -0.4 Large Growth -3337 -26518 -6.4 0.3 World Bond -3116 13711 -0.9 -3.1 Source: Morningstar Top & Bottom-Flowing Active Funds Below we present the list of top and bottom flowing active funds for August: Top Flowing Active Funds Net Inflow ($ in million) Performance (%) Aug-15 1 Year Aug-15 1 Year DoubleLine Total Return Bond Fund (MUTF: DBLTX ) 965 12245 -0.3 -1 PIMCO Income Fund (MUTF: PONAX ) 750 10659 -1.2 -4.2 Strategic Advisers Core Fund (MUTF: FCSAX ) 743 2549 -4.8 -5 Brown Advisory WMC Strategic European Equity Fund (MUTF: BIAHX ) 680 725 -6.6 -3 T. Rowe Price Emerging Markets Stock ( PRMSX) 649 1940 -9 -20 As we can see, all these top flowing active funds had ended in the red for August and also over the last 1-year period. The reason is not necessarily the inflows, but as we know August has been a cruel month for the broader markets. However, once we compare the performance of active funds that had the biggest outflows, we will see that their loss was much larger. This is in contrast to the trend we noticed for the fund categories in August; where categories with largest outflows suffered relatively less losses. Bottom Flowing Active Funds Net Outflow ($ in million) Performance (%) Aug-15 1 Year Aug-15 1 Year GMO Asset Allocation Bond (MUTF: GABFX ) -2,018 -1,902 -0.6 -11.3 PIMCO Total Return (MUTF: PTTRX ) -2,015 -124,484 -1.1 -4 Templeton Global Bond (MUTF: TPINX ) -1,922 -6,013 -5.4 -14 Franklin Income Fund (MUTF: FKINX ) -1,473 -3,035 -4.4 -14.8 Oppenheimer Developing Markets (MUTF: ODMAX ) -1,059 -1,824 -10.6 -27 Source: Inflow/Outflow data from Morningstar; Performance data calculated using GoogleFinance. For the first time since Bill Gross quit PIMCO to join Janus , the PIMCO Total Return Fund was not at the bottom of funds with the most outflow. It took up the second seat instead. Its 1-year net outflow leads the pack, but the loss is not as much as others. PTTAX has lost 4% over the 1- year period, whereas the others including the Oppenheimer Developing Markets Fund, the Franklin Income Fund, the Templeton Global Bond Fund and the GMO Asset Allocation Bond Fund have suffered larger losses. Coming to Zacks Mutual Fund Ranks, the DoubleLine Total Return Bond Fund, the PIMCO Income Fund and the Templeton Global Bond are the only ones that currently carry a favorable rank. While DBLTX carries a Zacks Mutual Fund Rank #1 (Strong Buy) , the latter two carry Zacks Mutual Fund Rank #2 (Buy). The Strategic Advisers Core Fund and the PIMCO Total Return Fund have a Zacks Mutual Fund Rank #3 (Hold). Meanwhile, the T. Rowe Price Emerging Markets Stock Fund and the GMO Asset Allocation Bond Fund hold a Zacks Mutual Fund Rank #4 (Sell) and the Franklin Income Fund and the Oppenheimer Developing Markets Fund carry Zacks Mutual Fund Rank #5 (Strong Sell). As said, in certain cases there is more arts than science. Fund flows may be just a fraction of a factor to help a fund’s uptrend. Inflows may not translate into gains for mutual funds. Investors do not necessarily have to buy funds that are seeing strong inflows and vice versa. Link to the original post on Zacks.com