How to Analyze Fund Flow Data

Using Fund Flows to Gain an Edge

Waves made of cash, representing fund flows.

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The majority of investors purchase mutual funds and exchange-traded funds (ETFs) to gain exposure to domestic and international equities. Both mutual and exchange-traded funds use pooled investor money to invest in securities that match the fund's investment 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 for investors that know how to read them.

In this article, we'll explore what fund flows are and how investors can utilize them in order to gain an edge when investing domestically or internationally.

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, which tends to create demand for the underlying stocks and bonds in their sector of choice. Conversely, net outflows reduce excess cash for fund managers and tend to result in lower demand for stocks and bonds.

As a result, investors can use fund flow information to determine 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 or not investors are putting money into the market or taking it out, which helps in painting an overall macroeconomic picture of what's happening.

Investors can find fund flow data within individual fund filings or via financial data aggregators like Morningstar that provide both data and commentary. Every year, Morningstar issues an Annual Global Fund Flows Report that outlines where global funds are being allocated for each year that's highly watched by international investors.

Analyzing Fund Flows

Fund flows can provide investors with a lot of information about where capital is being committed around the world. In particular, Morningstar's annual commentary can provide unique insights to help support a global macroeconomic investment thesis, while active traders can look toward more real-time data to drive their 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 clearly observed throughout the 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 and which are falling out of favor.

Putting It Into Context

Fund flows can be used to identify past investment trends, but looking toward the future is the key to profit for investors. Since money managers tend to be behind the curve—that is, they tend to underperform the broad market indices—investors should pay careful attention to the patterns that emerge from fund flow data rather than the readings themselves.

For example, 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. Investors looking at this data may want to consider selling their U.S. fixed income ahead of fund selling that could precipitate downside.

In general, global investors 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 particularly useful for global macroeconomic investors, but other investors can be sure to find some insight into fund flow data for use in their own trading and investing.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.