Single-stock flow data to put managers under more scrutiny

State Street Global Markets will launch next year the next phase of its funds flows information service, through the Global Link trading solutions, which will for the first time allow clients to analyse the flow of money into individual stocks around the world.

Global Link uses the aggregate information from the $US12 trillion in assets under administration by State Street and provides research on the trends evident from the flows. In the early phases of the development of the service, flows to and from regions and countries were analysed for equities, bonds and currency investments. Now, with individual stock analysis, State Street is able to provide a raft of new information showing how different types of investors (mainly funds managers) interact in the marketplace and subsequent effects on both stock prices and manager returns. Ken Froot, professor of Business Administration at Harvard Graduate School of Business, told the Global Markets conference yesterday that different investors had different capacities to absorb assets when they were cheap and sell assets when they were expensive. This depended on their strategy characteristics – such as market cap, value, momentum and ‘carry’ (investing for dividend yield) – and portfolio characteristics – such as level of concentration, returns and turnover. Froot, who also works with the State Street Associates research group, said: “We look at all the attributes and identify the different types of investors in the marketplace.” Preliminary results showed that there was a lot of persistence in strategies for levels of concentration and turnover, but less so for the momentum style. Funds managers with the lowest returns tended to be the least “patient” because they were more “motivated” about a stock and tended to take liquidity from the market. Investors with higher returns tended to be more patient and were providers of liquidity. However, highly concentrated portfolios tended to show more patience than broader market portfolios. Froot said there were similar results evident from foreign exchange analysis. And funds (managers) with negative returns and outflows tended to sell more of their pre-existing positions, while those with positive returns and inflows tended to buy more of their pre-existing positions. “The research is only beginning to touch on the implications,” Froot said. If there is a piece of good news for a stock or currency, the analysis can show how much follow-on buying is likely to come from momentum investors based on the capital they have, the elasticity of their response and the size of their pre-existing positions. Similarly, clients can see how much selling there will be from value investors based on the same information. “It’s understanding the dynamics of prices in the marketplace based on the dance which is going on between the different types of investors,” Froot said. He said he expected that the stock analysis service would be available about next March.