Mutual fund companies often assess their business performance based on the growth of their assets under management (AUM) and their fund flows. However, market share and change in market share are considered more effective measures of performance, and a new framework has been introduced to analyze market share dynamics among fund families. This framework provides insights into the strengths and weaknesses of mutual fund firms. The research decomposes changes in market share into four components of business performance: category performance, excess performance, category flows, and excess flows.
Components of Market Share Change
- The Category Performance Component is driven by the investment performance of fund categories relative to the market average.
- The Excess Performance Component measures how the company’s funds fared relative to competing funds in the same category.
- The Category Flows Component depends on the net flows of the fund categories in which the fund firm is active, relative to the market average.
- The Excess Flows Component measures how much a fund company outsells its category peers or achieves higher relative flows than the category average.
Market Analysis Results
Analysis of US mutual fund data from 2001 to 2018 reveals that approximately 42% of market share changed hands among fund companies during the 18-year period. The Excess Flows Component had the largest impact on individual companies’ performance. Additionally, all four components are found to be persistent, with the flow-driven components dominating the performance-driven components over longer time periods.
Applications
The framework can be used by mutual fund companies to attribute changes in their market share to the four components of business performance, allowing executives to make strategic decisions based on this knowledge. It can also be applied by regulatory authorities, consultancies, research firms, academic institutions, and other stakeholders to assess the relative strengths of investment firms and study market dynamics. Market share change is a crucial indicator of a fund company’s performance relative to its peers, especially during down markets or periods of heightened volatility.
As the analysis did not extend into 2020, it is anticipated that the gap between market share winners and losers will be greater this year than the average.
Overall, the framework offers valuable insights into the changing dynamics of market share and can be utilized by various stakeholders to gain a deeper understanding of the mutual fund industry.
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Author : Editorial Staff
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