New research released in Rainmaker Information’s latest RMetrics Equities Report has revealed that the money-weighted rate of return for managed investment products in outflow is higher on a per dollar basis. That is, it’s more cost-efficient to invest into these products, presenting a unique opportunity for investors.
"Investors often think that a fund in net outflows is a red flag, indicating that other investors are bailing out and that they should follow them," says John Dyall, head of investment research at Rainmaker Information.
"But this may not always be the case. In fact, investing in managed investment products that are in net outflows may be a smart investment strategy, or at least smarter than chasing returns in the popular funds."
The report compared returns achieved by international equities products calculated using the time-weighted rate of return method and the money-weighted rate of return method.
It then compared these returns under conditions of positive fund flows, negative fund flows and all fund flows over the three-year period to December 2022.
The time-weighted return is the de facto standard used to assess investment manager performance, skill and underlying portfolio risk. It is used in all timeseries analyses, including performance tables. It ignores any impact of net flows.
The money-weighted return measures the returns investors actually received. It tells the investor how much their portfolio returned after taking into account the timing and size of deposits and withdrawals into and out of their investment portfolio.
Under the condition of net positive fund flows, the time-weighted rate of return was 5.5% pa versus a money-rated rate of return of 3.1% pa.
“This means that people invested in these funds after the good times were over,” said Dyall.
Under the condition of net negative fund flows, the money-weighted rate of return was higher than the time-weighted rate of return, 5.6% pa versus 5.2% pa respectively.
In periods of net outflow, the money-weighted return will generally outperform the time-weighted return and in periods of net inflow, the money-weighted return will underperform the time-weighted return.
The report highlights several factors that contribute to the paradoxical nature of net outflow investments.
Despite the potential benefits of investing in managed products that are in net outflows, Dyall cautions that investors to still conduct their due diligence and seek professional advice before making any investment decisions
Overall, the report suggests that the investment styles followed by any international equities managed fund has periods when it outperforms or underperforms other styles.
Investors often jump on board following strong performance “just when the party is starting to end,” said Dyall.
“Investing is not a popularity contest, or at least it shouldn’t be. When you look at the net flows numbers, and then at the actual performance achieved by real investors, it appears may investors and their advisers have yet to get the message.”
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