Clarity Ebbs in Mutual Fund Flows
Mutual fund flows shouldn’t really matter much from week to week.
They’re a fraction of money moving into and out of global investments at any given time, with institutions, sovereign-wealth funds and central banks typically accounting for a much greater proportion of flows. And yet mutual fund deposits and withdrawals are often the only window analysts have to gauge sentiment in something resembling real time.
Mutual fund data is thought of as a bellwether for investor behavior in broader markets and specific investment firms. Every week, strategists parse over the numbers, using them to answer questions like whether money is heading to riskier assets or safe havens and whether cash is flowing more to bonds or stocks.
And there are some legitimate reasons for prospective investors to consider flows. If a fund keeps receiving withdrawals, it may have to keep bigger cash reserves on hand or sell assets in an unfavorable market, possibly hampering performance.
Given this backdrop, it’s problematic that big funds use different methods to calculate their flows. Pimco, for example, made a shift at the start of 2015 to include reinvested dividends and capital gains in its flow reports, a method different from its peers including Fidelity Investments, DoubleLine Capital and Legg Mason, according to Bloomberg News reporter John Gittelsohn.
Pimco says it had been planning to make this shift for a while, even before the contentious departure of co-founder Bill Gross spurred a cascade of withdrawals, to align its methodology with other parts of Munich-based Allianz, Gittelsohn wrote in an article on Monday. The Newport Beach, Calif., investment firm has lost about 30 percent of its managed assets since its 2013 peak of $2.04 trillion.
The timing of the change suggests another less-pure motive: to make it look as if Pimco was receiving deposits when money was, in fact, being withdrawn. To be fair, Pimco is not alone in its methodology. BlackRock and Janus report their data in a similar way.
Regardless, it's not great to have inconsistencies in data that has so much influence across the industry. On one hand, it makes sense for investment firms to emphasize the income generated by the assets they hold. But if flows are key to determining investor sentiment, rightly or wrongly, the broader industry standard should really report all new investor money in and out, stripped of generated income and capital gains.
When it comes to choosing mutual funds, investors ought to care more about performance and investment methodologies than the periodic scorecard of money flows. But to the extent they do look at flows, they should be able to draw a reliable comparison.
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