A turn higher in fund flows would benefit BEN, TROW, and JNS

By Jonathan Casteleyn, Sr Financials Analyst • Feb 5, 2013 9:30 am

While equity mutual fund flows have started to improve in 2013, as investors chase the appreciating stock market, our research shows that historically it takes about 6 months of improved market performance to drive fund flows substantially higher.

As outlined in our recent article Equity fund flows continue higher but international flow still stronger than domestic, equity mutual fund flows have sprinted higher to start 2013, breaking a persistent downtrend over the past two years. The recent 3 consecutive week inflow of over $14 billion into domestic funds, as reported by the Investment Company Institute (ICI), was the highest 3 week period since February 2011. The respite from consistent fund outflows, which marked most of last year, is welcomed by leading fund managers who benefit from inflow trends. However, our research shows that the best fit line ¹ is that fund flows take about 6 months to substantially improve based on market conditions.

The most important variable for improved mutual fund flows is appreciating markets, as investors allocate more money to stocks when equity markets are going higher. As outlined in the chart above, the 6 month moving average of equity fund flow has a very close relationship with the performance of the markets as measured by the MSCI, much more so than the 1 month, 3 month, and 1 year studies that we did. We believe that this 6 month relationship exists, as investors rarely catch the exact inflection point when market performance improves. But after a 6 month period, retail investors are drawn into the market and fund flows greatly improve.

Thus, the 3 week start of improved mutual fund flow is a good start to the New Year for the biggest mutual fund providers, however history suggests that it will take up to almost two more quarters or another 5 months of steady market performance to really turn fund flow sustainably higher. The asset managers with the biggest equity mutual fund franchises that would benefit from a sustained turn higher in fund flows include Franklin Resources (BEN), T Rowe Price (TROW), and Janus Capital (JNS). State Street’s Financials ETF (XLF) also houses many financial services firms that benefit from higher equity markets and improved fund flow.