For decades, Fundland has operated under the premise that stellar fund performers attract investors, just as laggards drive them away. While the combination of performance and flows (sales and redemptions) remains a key determinant of the industry’s success, this relationship is not as solid as in the past—the continuation of a trend we identified the last time we addressed this subject in July 2005. The traditional performance-drives-flows thesis has been increasingly challenged in recent years amid the growing popularity of fund wraps, which have changed the face of Fundland, promoting a more stable, buy- and-hold approach to investing. The current market turbulence makes this a particularly interesting time to update this research.
Our analysis drills down into the performance experience of the fund wrap segment by documenting the returns and ratings of wrap portfolios and their building blocks. The average experience within fund wraps of sub-advised and in-house managed funds are compared. We also investigate the performance-flows connection at the asset class level. Rates of return and Morningstar Ratings were generously provided by Morningstar Canada.
This month’s Trend Lines article summarizes our performance benchmarking research, an elaborate methodology that isolates a complex’s beta, based on overall industry returns. After stabilizing the results to account for the asset mix differences of the individual companies, the research identifies each complex’s alpha (the value added by its investment managers) and its dollar impact on the asset base. Possibly, the most valuable aspect of this analysis is that fund companies are compared and benchmarked to the overall actual performance of the entire fund industry itself, and not to traditional index-based benchmarks.