Mutual fund companies often judge their business performance by the growth of their assets under management (AUM) and their fund flows. But these metrics offer little insight into how a firm is faring relative to its competition.
Rather market share and change in market share are more effective gauges of mutual fund companies’ business performance. That’s the premise I lay out in “A New Framework for Analyzing Market Share Dynamics among Fund Families” for the Financial Analysts Journal. In the article, I also present a method that explains changes in market share over time and helps identify the strengths and weaknesses of mutual fund firms.
The Four Components of Business Performance
The framework output distills the drivers of the market share change and indicates whether a fund company outperformed and outsold funds in the same categories. It also determines whether the company benefited from its fund range having exposure to categories that experienced favorable performance or fund flows.
Because fund market share is calculated on the basis of AUM, changes in market share in a given period are driven not only by investors buying and selling mutual fund units, but also by the investment performance of the existing assets since the period began. A fund gains market share when the sum of its returns and relative flows — net flows as a percentage of the fund AUM at the start of the period — is greater than that of the market’s.
The research decomposes changes in market share into four components of business performance:
- The Category Performance Component is driven by the investment performance of fund categories that the fund company is active in, relative to the market average.
- The Excess Performance Component measures how the company’s funds fared relative to competing funds in the same category.
- The Category Flows Component depends on the net flows of the fund categories in which the fund firm is active, relative to the market average.
- The Excess Flows Component measures by how much a fund company outsells its category peers — or achieves higher relative flows than the category average.
The Four Components of Market Share Change
|Category vs. Market
|Fund vs. Category
|1. Category Performance Component
Is the company well represented in categories with favorable performance?
|2. Excess Performance Component
Does the company outperform category peers?
|3. Category Flows Component
Is the company well represented in categories with favorable net flows?
|4. Excess Flows Component
Does the company outsell category peers?
Market Analysis Results
So what components have driven the most market share change in mutual fund companies and what does the framework reveal about market dynamics?
To answer that question, I analyzed US mutual fund data from 2001 to 2018. The sample consisted of 15,242 funds belonging to 1,428 fund companies.
The main findings were as follows:
- Excluding mergers and acquisitions, approximately 42% of market share changed hands among fund companies during the 18-year period. In an average month, 0.6% of market share was redistributed.
- Individual companies score very differently on each of the four components depending on their business performance. The Excess Flows Component had the largest impact.
- All four components are persistent. In particular, when a company loses market share in total or on one of the components in a given period, the odds of a negative outcome in the next period are high.
- The longer the time period over which market change was analyzed, the more the two flow-driven components dominated the performance-driven components. Why? Because flows are more persistent than performance. But that doesn’t mean fund companies can ignore performance and focus only on marketing and sales. Past fund performance and past category performance are both significant drivers of change in market share.
Development of AUM and the Number of Mutual Fund Companies
With this framework, mutual fund companies can attribute changes in their market share to the four components of business performance. By identifying what’s driving their business, executives can use that knowledge to guide their strategic decision making.
Since the data is public and no proprietary input is required to conduct the analysis, regulatory authorities, consultancies, sell-side and buy-side research firms, academic institutions, and other external stakeholders can apply the framework to assess the relative strengths of investment firms and study market dynamics.
To determine how a fund company is performing relative to its peers, market share change is the indicator to watch. During down markets or amid periods of heightened volatility, changes in market share tend to be larger.
Consequently, while my analysis did not extend into 2020, there is reason to believe that the gap between market share winners and losers will be greater this year than the average.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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