New research questions what could be considered industry-accepted wisdom: strong investment performance drives asset flows.
A white paper released this month by Chestnut Advisory Group, “Your Performance Doesn’t Really Matter: What Successful Asset Managers Do Differently,” finds that investment performance is not the primary driver of asset flows.
“It may be an industry assumption that positive capital flows follow strong investment performance, but Chestnut’s analysis shows that asset managers who delivered the best investment performance did not raise the most capital,” the company stated in a press release.
These asset managers that raised the most capital may not have delivered the best investment returns, but they did raise more than four times the capital of the best investment performers.
According to the paper, the top quintile of funds ranked by trailing-three-year returns raised about $42 billion in capital for the six-year period, whereas the top-quintile funds ranked by net flows raised more than $175 billion for the period. This was true within each of the four asset categories Chestnut examined.
To test the assumption that capital is correlated with investment performance, Chestnut looked at quarterly data on 931 products from eVestment, for the periods September 2006 to December 2013, covering four asset categories: emerging markets, U.S. high yield, global fixed income and U.S. small- & mid-cap equities. Chestnut then examined the relationship between investment performance and net asset flows and looked at correlations between these two variables and the characteristics of the most effective asset gatherers.
So, what drives asset flows? “Great investor relations,” they say.