What it means
Fund flow answers a narrow but useful question: how much new money arrived, and how much left. Subscriptions and purchases are inflows, redemptions and sales are outflows, and the difference between them is the net flow for the period.
The point of measuring it separately from performance is that a fund's assets can grow for two very different reasons. Markets can rise, which flatters the total, or investors can genuinely commit new money, and only the second tells you anything about confidence in the manager or the strategy.
Fund managers themselves care about flows for practical reasons. Persistent outflows force selling at times the manager would not choose, can leave a fund holding a distorted portfolio, and eventually make a fund too small to run economically.
Analysts use flows as a sentiment indicator across whole categories. Sustained money moving from bond funds to equity funds, or from active managers to index trackers, is a visible record of investor behaviour that is hard to argue with.
One warning about the term: in older accounting texts, "funds flow statement" refers to a sources and uses of funds statement, an ancestor of the modern cash flow statement. The two meanings are unrelated, so it is worth checking which one a document intends before drawing conclusions.
In practice
Real-world examples.
Example
An asset manager reports assets up 9% for the year but net outflows of $1,200,000,000. Every dollar of the increase came from rising markets, and analysts mark the shares down because the underlying business is shrinking.
Example
A wealth adviser reviewing a corporate bond fund notices six consecutive months of outflows totalling 18% of the fund's assets. She moves clients out before forced selling starts to affect the remaining holders' returns.
Example
A fund launching a new sustainable equity strategy tracks weekly flows during its first quarter. Inflows of $40,000,000 against outflows of $6,000,000 give a net flow of $34,000,000, comfortably above the $25,000,000 needed to make the fund viable.
Formula
Calculation
Net fund flow = Gross inflows - Gross outflows
Organic growth rate = Net fund flow / Beginning assets under management
Ending assets = Beginning assets + Net fund flow + Market movement
The Selkirk Global Income Fund began the year with $6,000,000,000 of assets. During the year it received $850,000,000 of subscriptions and paid out $610,000,000 of redemptions, and its investments generated a gain of $180,000,000.
Net fund flow = $850,000,000 - $610,000,000 = $240,000,000.
Organic growth rate = $240,000,000 / $6,000,000,000 = 4%.
Ending assets = $6,000,000,000 + $240,000,000 + $180,000,000 = $6,420,000,000.
Total growth in assets = $420,000,000 / $6,000,000,000 = 7%.
Of the 7% growth in the fund's size, 4 percentage points came from investors adding money and 3 percentage points came from markets. Reporting only the 7% would overstate how well the fund is winning business.Case study
Seen in the real world.
Marlow Ridge Partners is an illustrative and fictional boutique fund manager used here to show how flows and performance can point in opposite directions. Its flagship fund started a year with $900,000,000 and finished with $945,000,000, and the marketing team prepared a note celebrating growth of 5%.
The finance team decomposed the change before the note went out. Market gains had added $135,000,000, while subscriptions of $120,000,000 were more than offset by redemptions of $210,000,000, a net outflow of $90,000,000, or an organic growth rate of -10%.
Presented that way, the year looked quite different, and the board reacted accordingly. It commissioned interviews with the departing clients, found that most had left over fee levels rather than performance, and repriced the fund before the outflow became self-reinforcing, which in this fictional case saved the strategy.
Watch out
Common mistakes.
- Reading growth in assets under management as evidence of new business. Rising markets can mask heavy outflows, which is why organic growth is reported separately from total growth.
- Treating a single month of flows as a trend. Flows are lumpy, and one large institutional mandate arriving or leaving can swamp the underlying pattern.
- Assuming strong inflows always mean a fund is a good buy. Money often arrives after a strong run, and a fund that grows too quickly can find its strategy harder to execute.
Questions
People also ask.
Is fund flow the same as cash flow?
No, cash flow describes money moving through a business, while fund flow describes investor money moving into and out of a fund or asset class.
What is a healthy organic growth rate for a fund manager?
Anything positive is respectable in a competitive market, and consistent mid single digit organic growth is generally regarded as a strong result.
Can a fund with net outflows still perform well?
Yes, though heavy redemptions force the manager to sell holdings to meet them, which can generate tax charges and trading costs for the investors who remain.
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