How to Analyze Fund Flow Data

Using Fund Flows to Gain an Edge

Waves made of cash, representing fund flows.

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Many investors purchase mutual funds and exchange-traded funds (ETFs) to gain exposure to domestic and international equities. Both mutual funds and ETFs use pooled investor money to invest in securities that match the fund's objectives.

On a monthly or quarterly basis, these funds must report the amount of money flowing into or out of their accounts. These fund flow reports can provide valuable information if you know how to read them.

Learn what fund flows are and how you can utilize them to gain an edge when investing, both domestically and internationally.

Key Takeaways

  • "Fund flow" refers to how capital flows into and out of different investment types and instruments.
  • Flows tell you where other investors are placing their money; they can even tell you how they balance their portfolios.
  • Fund flow analysis should be used as a top-down perspective on investing, especially for international investors.

What Is Fund Flow?

Fund flows show cash inflows and outflows across various financial assets on a monthly or quarterly basis. Net inflows create excess cash for fund managers to invest. This tends to generate demand for the underlying stocks and bonds in their sector of choice. On the other hand, net outflows reduce excess cash for fund managers. This results in lower demand for stocks and bonds.

As a result, you can use fund flow to find out where capital is being invested in terms of asset class or geography. The overall growth in net fund flows can also provide insight into whether investors are putting money into the market or taking it out. That can help you paint a macroeconomic picture of what's happening.

You can find fund flow data within individual fund filings, or you can look at financial data aggregators, like Morningstar, that provide both data and commentary. Each year, Morningstar issues an Annual Global Fund Flows Report. It outlines where global funds are being allocated. This report is highly anticipated by international investors.

Analyzing Fund Flows

Fund flows can provide you with a lot of information about how capital is being committed worldwide. In particular, Morningstar's annual commentary can offer unique insights to help support a global investment thesis. At the same time, you can look toward more real-time data to drive your intraday areas of focus.

  • Fixed income: Fund flows into fixed income securities suggest a lack of confidence in equities and a flight to safety in most cases. For instance, net fund inflows into U.S. fixed income securities were seen throughout the last global economic crisis.
  • Asset classes: Fund flows into certain asset classes may carry different connotations. For instance, net fund outflows from global equities into U.S. large-cap value stocks could suggest that U.S. equities are relatively undervalued.
  • Portfolio mix: Fund flows into certain asset classes may also provide insight into portfolio mix.
  • Finding funds: Fund flow data shows which funds are most popular among investors. It can also show which are falling out of favor.

Putting It Into Context

Fund flows can be used to find past investment trends. But looking toward the future is the key to profit. Keep in mind that money managers tend to be behind the curve. That means they tend to underperform the broad market indices. So you should pay close attention to the patterns that emerge from fund flow data rather than the readings themselves.

For instance, suppose that U.S. fixed income has experienced a significant jump in net fund inflows over the past few months. But now, these net fund inflows have begun slowing and are showing signs of being top-heavy. If you're looking at this data, you may want to consider selling your U.S. fixed-income assets ahead of the mass fund-selling that looks to be on the horizon.

In general, as a global investor, you should use fund flow data to paint a top-level picture of what's happening on a global scale and use that information to build a more specific investment thesis. The data is beneficial for international macroeconomic investors, but even if that's not you, you're sure to find some insights using fund flow data that you can use in your trading and investing.