The best advisors and fund companies try to read two distinct (and often contradictory) “winds,” judging where their investing business is going.
The first is the technical side of investing, the one every financial news outlet spends every moment of every trading day dissecting. What sectors, stocks, instruments are heading towards outperformance? or underperformance? How can I actually maximize returns, minimize risk, etc.?
The second wind is the un-technical side of investor (client) sentiment. While individual investors may act deliberately and with intelligence, taken en masse, as we know, behaviours trail behind technical reality, and the timing is wrong more often than right. But if clients – today, for example – are willing to overpay for safety, or will blindly chase the almighty dividend, the industry needs to have their fingers on the pulse of those trends. Some will simply “sell them what they want”, but others will use the knowledge to coach, to shift, to educate, to re-adjust offerings, etc.
If you’re a sailor – or an investment analyst of any kind – you know the ‘window’ is important. Fixating on each random gust may not be of much importance or even cause the novice sailor confusion; but taken together, over time, the astute sailor notices the wind direction is changing. As many in the investment business will tell you, watching CNBC or BNN all day – getting caught up in their “micro-focus” – can actually hurt your ability to see the bigger trends, both on the technical side of investing, and especially, on the client-sentiment side.
So in reading about the ETF flows for Q1, I can’t help but wonder if ETF flows might arise as a new middle-ground bellwether, a helpful window for getting an insight into the two winds. Less noisy and to-the-minute than analyzing raw equity trading; but a bit ahead of the mutual fund-flows (usually lagging behind due to the extra friction of commissions, load-structures, and the reflective nature of the advisor-client relationship). I’d love to see a “big data” analyst break down the relationship & time lags (if any) between ETF flows and mutual fund flows. Please let me know if you become aware of any such research.