These are febrile times on emerging markets. Stocks, bonds and, especially, currencies have been hit by sudden price movements for reasons that may be clear with hindsight, and even with foresight, but for which there is often no obvious trigger on the day that trouble strikes.
Hoping to be forewarned, investors often turn to the data. Among the most widely followed — and also the most closely guarded and highly priced — are data on portfolio flows.
Changes in the size and direction of flows are significant events, widely reported in the Financial Times and elsewhere and the subject of regular, detailed and eagerly awaited research notes by sellside analysts at investment banks.
But are such data any good? And do they tell investors anything not already visible in asset prices?
“We get a lot of hits [for our reports]. A lot of clients are really interested,” says one strategist at an international bank.
“Personally, I think they’re pretty useless.” Assessments of the most widely followed data by other strategists and analysts voiced this week include “frankly not very useful”, “partial and incomplete”, “a picture of the past that has nothing to do with the future” and “a marketing tool”.
Could it be that investors are being sold something they don’t really need? Perhaps not entirely.
Two of the best-known data sets are those produced by EPFR, a Boston-based data gatherer that began following flows into and out of emerging market debt and equity mutual funds in 1995 and later expanded to include developed market mutual funds and ETFs; and the Washington-based Institute of International Finance, an industry association that for three decades has tracked cross-border flows to EM debt and equity markets by non-resident investors, along with much broader cross-border capital flows.
EPFR’s data are supplied weekly and reported to it by about 93,000 funds worldwide with combined assets under management of some $34tn, which it estimates is about 80 per cent of all assets managed by such funds and about a third of all AUM worldwide.
In dedicated EM funds (based in both emerging and developed markets), it covers AUM of about $2.4tn, out of total AUM in EM funds estimated at $6.4tn by the Investment Company Institute. The total value of all EM AUM worldwide is estimated at $10.2tn by PwC.
EPFR makes no claim to be comprehensive but says it offers a representative sample of the investable universe with consistency across time and geographies, able to capture broad shifts in sentiment and to identify inflection points.
It is, says Cameron Brandt, research director, “a blunt proxy for a significant slice of the investing public, both institutional and retail”.
The IIF’s data are drawn from national sources, primarily central banks and stock exchanges, covering balance of payments data in its quarterly reports and higher frequency data in its monthly, weekly and daily data sets, which involve varying degrees of modelling and estimation.
Its data are aimed at a wider audience than portfolio investors alone. Sonja Gibbs, senior director, says they are useful to currency and credit traders “literally going with the flows” and to corporate treasurers at multinational companies thinking about their next investment decision, among others.
The IIF claims a high level of comprehensiveness for its quarterly data but makes no secret of the limitations of its daily sources — 11 countries for equity flows and 12 for bonds — although it does claim a high degree of correlation between its high-frequency series and its longer term series drawing on balance of payments data.
For portfolio investors, data from both EPFR and the IIF have a powerful appeal. According to one strategist, “it is almost a crutch — they want to know the data, just because this is their business”.
There may be real value, too, in identifying differences in behaviour between institutional and retail investors (which EPFR offers, at a price) and between actively managed and passive funds, or between local and foreign investors.
There is also the appeal of being told what has actually happened (always allowing for errors, omissions and other distortions): many reported asset prices are simply the prices quoted by brokers, and may not be based on or even reflect actual trades. What most data-watchers look for, however, is change.
After recording portfolio outflows from EMs of $12.3bn in May, for example, the IIF identified inflows of $6.2bn in the 12 days to June 11, including significant flows to China, South Korea and Indonesia, and smaller flows to India.
“You’re catching a reaction, which may or may not be an indicator of a longer term move,” says Ms Gibbs.
But big investors contacted by the FT said they preferred to rely on information from their own trading desks.
No matter how timely, outside information is always a reflection of the past. “It can tell you you’ve just had a great time,” said one. “It can’t tell you what’s coming up next.”
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