This summary gives a practitioner’s perspective on the article “A New Framework for Analyzing Market Share Dynamics among Fund Families,” by Jan Jaap Hazenberg.
This article decomposes market share changes among fund families into four components to better understand mutual fund market dynamics and to evaluate the business performance of individual fund families.
What’s the Investment Issue?
Most investment firms rise and fall by the quantum of assets they manage. Their market share, calculated as a fund family’s assets under management as a percentage of the total market assets, is therefore of paramount importance to their business models. A fund family is typically multiple fund types and strategies that are managed under a single, large brand name.
This article tracks changes in market share of mutual fund families and breaks down market share performance into key components, providing a framework for investment firms to pinpoint where their strengths and weaknesses lie.
How Does the Author Tackle the Issue?
Changes in market share, the author shows, comprise four components of business performance:
- The Category Performance Component shows the performance of fund categories relative to the market average.
- The Excess Performance Component measures the performance of funds relative to their peers—that is, after adjusting for the performance of the category as a whole.
- The Category Flows Component measures the flow of funds into a particular category.
- The Excess Flows Component measures the extent to which a fund family outsells its peers, after adjusting for category flows.
The author scores each of these components, using US mutual fund data from 2001 to 2018, to establish which are the greatest drivers of market share change in fund families.
What Are the Findings?
The Excess Flows Component, which measures flows compared with peers, has the largest impact on monthly changes in the market shares of fund families. This finding is independent of market conditions, such as average fund returns, net fund flows, market volatility, and investor sentiment.
Over longer time periods (more than a month) the flow-driven components are more important than performance-driven components. This, the author argues, is because flows are more persistent than investment performance. That is, good performance over a short period can lead to high flows over a longer period. However, fund families cannot neglect fund performance and focus only on marketing and sales. Past fund performance is a strong driver of excess flows and past category performance is a big driver of category flows. The framework also reveals that fund families score very differently on each of the four components, with few families obtaining high scores in all four. This implies that the framework could be used by firms to improve performance in certain, weaker business areas. The framework can also be applied to the market share of active versus passive funds. Over the period of the study, passive funds increased their market share by 26.3 percentage points, from 9.4 percent to 35.7 percent. In contrast, actively managed equity funds lost 35.4 percentage points of market share. Excess flows were the biggest contributor to the rise in passive funds’ market share, meaning that in categories where active and passive funds compete, passive funds obtain greater flows. The Category Flows Component shows that the market share of active equity funds declined as a result of investors re-allocating to other categories, notably fixed income and allocation strategies.
What Are the Implications for Investors and Investment Managers?
By evaluating business performance versus the competition, the market share analysis framework helps to identify a fund family’s strengths and weaknesses.
Executives can use the framework as an input into their strategic decision making. For instance, fund families that are losing market share because of a negative score on the Excess Performance Component might aim to strengthen their investing capabilities, such as by hiring, firing, or reassigning asset managers or by launching new funds while merging and liquidating existing funds. Meanwhile, fund families that score poorly on the Excess Flows Component might want to rethink aspects of their commercial strategy, such as marketing, distribution, and pricing.
Because the framework is based on public data and does not require proprietary input, it can also be used by external stakeholders, such as regulatory authorities, consultancies, sell-side or buy-side research firms, or academic institutions, to assess the relative strengths of investment firms.