Veritas – Why it pays to look behind German fund flow statistics

Statistics may not lie, according to one adage, but in financial markets sometimes they may not reveal the whole truth, either.

Statistics for May and June for just one ETF in Germany – the iSharesDAX ETF – will show a net outflow of just €200m. Across the whole Dax index, this is hardly earth-moving.

But view the months discretely, and you see the BlackRock ETF suffered €3.8bn of net outflows April, but then took almost all of it (€3.6bn) back in May.

This seems like an extreme and quick change of mind by liquidity-seeking investors, and it would not be unusual in the risk-on / risk-off markets of today.

But the reversal of fortunes of iSharesDAX ETF was in fact largely due to opportunistic investors taking advantage of the dividend distribution schedule, explains a spokesman for the Bundesverband Investment und Asset Management in Frankfurt, which gathers statistics on German fund flows.

Most of the flows had occurred within just one week, between 28 April and 4 May.

The sudden reversal of ETF flows in this example is mirrored in analysis by BlackRock of all European-domiciled ETFs providing German single country exposure.

Net inflows of €1.1bn in the final quarter of 2011 were halted abruptly in the first quarter of this year, by net outflows of €243m.

A difference between top-level statistics and the more detailed reality in the iSharesDAX ETF reminds of an occasion exactly four years ago, at London hedge fund GLG Partners.

Greg Coffey, then manager of the firm’s $5bn emerging markets fund, was ‘running down’ the portfolio, after announcing his move to rival Moore Capital, to hand the portfolio over to his successors.

Even in the less liquid emerging markets sphere, $5bn of selling was not unusually large, especially not as the global crisis emerged and investors fled ‘risky’ developing markets. But beneath the Coffey statistic was the fact he had turned over the portfolio a staggering 56 times in just the month of May.

Trading of $254.6bn of emerging market securities inside one month is perhaps more notable, than $5bn of selling.

For the record, he made 5.1% for investors that month – despite the transaction costs.

Presumably traders in iSharesDAX also made money for their clients, amid high flows.

Both cases hardly help active, fundamental equities fund managers struggling to control their portfolio volatility amid significant political uncertainty.

But at the least, the pattern of flows may help the managers explain to clients why markets are so volatile, and difficult to navigate at the moment.


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