AUM Flow: Net Flows Against Market Movement Explained

Assets under management change for two separate reasons. The first is money arriving less money leaving, called net flows. The second is a change in the market value of what is already held. Only the first measures what the manager gathered. At Vaidehi Asset Managers Limited a rise of Rs 30,000 crore over the run below came with net flows of minus Rs 9,000 crore.

Two things that have almost nothing to do with each other get added together, and the sum is the figure that gets published first. One of them is somebody else's decision to hand money over or take it back. The other is a price that nobody at the manager had any part in setting. Added together they give a number that answers no question anybody actually has. The two have to be pulled apart again before the figure means anything.

What actually makes assets under management change between two dates?

A savings account has the identical shape, and nobody finds it confusing there. The balance on the last day of the year differs from the balance on the first day for two reasons that have nothing to do with each other: money paid in or taken out, and interest the bank credited. The two causes are obvious and separate, so nobody would look at a bigger closing balance and say they had saved more. At an asset manager the two causes are equally separate and far less obvious. Both of them arrive as one published figure.

Four separate things move assets under management, and a change between two dates is all four added together. Money arriving, when somebody hands money over. Money leaving, when somebody takes it back, is a redemptionMoney taken back out by the person it belongs to. The regulator sets what has to happen before it is paid, and how quickly, and that is covered separately.. The market value of what is already held moves on every session the market is open, without anybody at the manager lifting a finger. And the charge itself. A fee taken out of a holding reduces the very value it is taken from.

The first three of those four movers carry the whole of the split at issue. The fourth belongs somewhere else. How a charge is actually taken out of a holding, and what that does to the value the holder sees, sits inside the mechanics of a pooled arrangementA structure in which many people's money is held together and each person holds a claim on a share of the whole rather than on any particular asset. The mechanics of such an arrangement are covered separately. and is covered separately. A reader who knows there were four movers and that one was set aside on purpose is in a completely different position from a reader who thinks there were three.

The first two are handled differently again. Money arriving and money leaving are almost never published one by one. Money arriving and money leaving are added together first, and the single figure that results is the one everybody quotes. The combination is convenient and it is universal, and it throws away everything about how much money moved in each direction.

What are net flows, and over what period are they measured?

Net flows are money arriving less money leaving, over a stated period, before any movement in the value of what is held. The definition is complete as it stands. Each of the two halves carries a property the whole split rests on, so both are worth pulling apart before anything else happens.

Net flows are measured in rupees handed over rather than in value, so the figure can be negative in a period when the value held is rising. A flow is an event with a date on it: on some Tuesday a person decided to put money in, and on some Thursday another person decided to take money out. Neither of those events cares what happened to prices that week. Value is a completely different kind of quantity. Value is the market's opinion of what is already sitting there, restruck at the end of every session, and it changes without a single rupee moving in either direction.

A flow figure with no period attached is not yet a number. Money leaving over a month and money leaving over a year are two different statements about a business, and the same rupee amount means something close to trivial in one case and something serious in the other. A rate carries the same discipline. Nobody would accept a charge of 0.55 per cent without knowing whether that is a year or a quarter, and nobody should accept a flow figure without knowing the stretch it covers. Every flow figure below therefore says over the period, and the worked run states exactly which period that is.

AUM Growth: what is inside the headline rise between two dates?

The headline rise is the closing value less the opening value, and nothing more clever than that. The headline rise is the first figure published, the easiest one to compare across managers and the only one a reader can compute without being handed anything extra. The closing figure less the opening figure gives it. Easy access is the entire reason the headline dominates, and it is also the reason it does so much damage.

Everything from the four movers is inside the headline rise, added together and reported as one number, and once added the pieces cannot be recovered from it. A rise of Rs 30,000 crore cannot be worked backwards into how much of it was money and how much was price. The information is genuinely gone. Any reader who wants it has to be given a second figure by somebody who has it, and that is a very different situation from a reader who can work something out unaided.

Here is the property that makes the headline dangerous rather than merely incomplete. Being computable without help is what makes it the figure that gets used, and being unable to separate its causes is what makes it the wrong one to use alone. Both facts sit on the same number at the same time. A shopkeeper counting the till at closing time has the same problem in miniature: a fuller till at the end of the day could mean more customers came, or it could mean the same customers paid more for the same goods because prices moved, and the count alone will never tell them which.

AUM Growth vs Net Flows: when do the two point opposite ways?

Set side by side on the worked run, the signs come before anything else. Assets under management at Vaidehi Asset Managers Limited rose by Rs 30,000 crore, or 20.0 per cent of opening assets under management of Rs 1,50,000 crore. Net flows over the same period were minus Rs 9,000 crore, or minus 6.0 per cent of exactly that same base. One figure points up by a fifth. The other points down by a sixteenth. Neither of them is wrong.

Vaidehi Asset Managers Limited finished the period looking a fifth larger while losing money it had already gathered, and both of those statements are true at once. The pairing is not a paradox and it is not a trick of presentation. Two opposite-looking statements sit together whenever a quantity measured in money handed over is added to a quantity measured in price, the sum is published, and a reader then treats the sum as though it were the first quantity.

In percentages of one common base the three figures simply add, so the arithmetic that connects them fits on one line. Minus 6.0 per cent of opening assets under management, plus 26.0 per cent of opening assets under management, gives 20.0 per cent of opening assets under management. The flow, the market movement and the headline. Seen in that form, the headline stops looking like a measurement. The headline is a sum of two things that were never shown separately.

Which of the two is evidence about anything the manager did?

Net flows are. The market movement is not. The reason sits in the words this whole subject runs on. The manager's charge is struck on a value it does not control, and the movement in that value is a price that nobody at the manager sets. The movement arrives on the manager's assets from outside, it would have arrived whatever the manager did that week, and treating it as an achievement is treating weather as gardening.

A flow is a different kind of event entirely. Somebody sat down, looked at what they had, and decided to hand money over or to take it back. The decision is at least partly a verdict on the manager, and a flow is the only one of the four movers that carries the manager's name in it.

A flow is a verdict on many things at once, so a flow is evidence rather than proof. Overselling the figure is its own error. Money arriving may be a verdict on the manager, or on how hard somebody worked to reach the person handing it over, or on what the market did last year and how that looked in a table. Money leaving may be a verdict on the manager, or it may be a person paying for a wedding. Flows carry something the headline cannot carry at all, and they still do not carry one clean thing.

Whose decision actually produces a flow?

Somebody else's, always, and that single fact is the reason the figure is worth reading at all. Every rupee of net flow at Vaidehi Asset Managers Limited is a person or an institution choosing, on a date, to put money in or take it out. Not one of those decisions is the manager's to make. The manager can be told about them afterwards, it can try to influence them beforehand, and it cannot take them.

Ten shops in one mall pay their rent whether trade is good or bad, and the landlord collects the same amount either way. The shopkeepers' opinion of the mall never shows up in the rent. The opinion shows up on the day a lease comes up and somebody does not renew. The flow figure is the lease renewal, and the market movement is the value of the building. Both are real, both matter to the landlord, and only one of them is anybody's opinion of the landlord.

The same fact is why the four questions worth asking about any arrangement of this kind land where they do. Whose money is it: somebody else's. Whose decision is it, to keep the money there or take it away: somebody else's again. Whose risk is it, when the value falls: the person whose money it is, entirely. And who is paid regardless: the manager, on the size of the money rather than on what happens to it. Read those four answers together and it becomes obvious why flows, and not value, are the figure that carries information about the relationship.

What can a manager do about flows, and what can it not?

A manager can widen how many people it reaches. Reaching them runs through a distributorAny party that puts a manager's arrangement in front of the people who might hand money over, and is paid for doing so. The regulator sets what a distributor may be paid and how it must be registered, and that is covered separately. or a platform, covered separately. A manager can change what it offers. A manager can change what it charges. All three levers are real.

Now the two things it cannot do. A manager cannot make anybody stay. The decision to stay is not the manager's, and persistencyHow long money stays once it has been gathered. The regulator sets what has to be disclosed about it, and it is measured over stated periods. is a description of what other people did rather than a dial the manager turns. And it cannot make a market rise.

Everything a manager can do about flows works slowly and through somebody else's decision. The market moves the same value in a single session without asking anybody. That asymmetry is worth sitting with, because most readers have not put it together. A tuition class can advertise, change its fees, change what it teaches and improve every lesson, and it still finds out whether any of that worked only when the next term's enrolments come in. Meanwhile the value of the building it rents can move more in a week than a year of good teaching will move its fee income. Both facts describe the same business on the same day.

Why can the revenue line not establish which of the two happened?

A charge is a rate applied to a value, and the value at the close is the same value whether it arrived as money handed over or as a price move. The value does not remember how it got there. A value with no memory of how it arrived is enough to settle the question.

Two managers with identical revenue can have had opposite periods, so revenue is blind to the entire difference at issue here. One of them gathered money steadily through a flat market. The other lost money steadily through a rising one. Their closing values match, the same blended rateOne average rate standing in for the different rates charged across different arrangements. How it is built and why it moves is covered separately. is applied to both, and the two revenue lines come out the same. A reader looking only at revenue has no way to separate them and, worse, has no signal that there was anything to separate.

Which is why a rising revenue line at an asset manager is not by itself news. A rising revenue line is news about a value, and the value moved for reasons the revenue line does not carry. The number that survives this problem is not revenue at all: it is the operating marginOperating profit as a share of revenue. The operating margin measures the same thing for any institution, and that is settled separately., because costs do not rise just because a market did, and it is the flow figure, because that is the only line in the whole set that somebody chose.

What does a disclosed flow figure leave out?

A net figure is one number covering two movements, and adding them throws away everything about their size. Money arriving of one amount, less money leaving of another, produces exactly the same net figure as much smaller amounts of both, or much larger amounts of both.

A manager gathering heavily and losing heavily reports the same net flow as a quiet one, and those are not the same business at all. The first has a churn problem, a distribution engine running at full speed and a hole in the bottom of the bucket. The second has neither the engine nor the hole. Both report the same single figure. If the engine slowed, the two cases would behave completely differently, and the net figure will never separate them.

No gross movements sit underneath the net figure for this manager, so how much money arrived and how much left cannot be recovered from it. Underneath a real net figure sits a register of who holds what, maintained by a transfer agentThe party that maintains the record of who holds what and processes money coming in and going out against that record. The role is covered separately., and every gross movement is an entry in it. The Securities and Exchange Board of India (SEBI), at sebi.gov.in, sets what has to be reported about those movements and how often. Where an aggregate across the industry is published is a question for the Association of Mutual Funds in India (AMFI), at amfiindia.com.

The worked run, in full

The whole of it sits on one set of figures, with every line stated so that a pen can check it. Vaidehi Asset Managers Limited opened at Rs 1,50,000 crore. Net flows over the period were minus Rs 9,000 crore, or minus 6.0 per cent of opening assets under management. The market moved the value of what was already held by plus Rs 39,000 crore, or plus 26.0 per cent of the same base. Opening less the flow out plus the market movement gives Rs 1,80,000 crore at the close, and the headline rise is Rs 30,000 crore, or plus 20.0 per cent of opening assets under management. Minus 6.0 plus 26.0 is exactly 20.0, and that is the entire arithmetic on one line.

Now read the charge at both ends of that, and read the label that comes with it. At 0.55 per cent of assets under management a year, Rs 1,50,000 crore reads as Rs 825 crore and Rs 1,80,000 crore reads as Rs 990 crore, a difference of Rs 165 crore, or plus 20.0 per cent, exactly the same rise as the value. The two charge readings are bookends rather than a series. A charge of this kind is accruedRecognised as it is earned across a period rather than at a single moment. When a charge earned across a period becomes revenue is settled separately. across the period on the value as it stands day by day, so multiplying a rate by a closing figure will not reproduce what a period actually earned. Multiplying gives the top end of a range whose bottom end is Rs 825 crore. The gap is worth naming. A reader who skips it is one step away from the most convincing wrong number in the whole set. Every percentage here came out of two rupee amounts printed beside it: Rs 9,000 crore against Rs 1,50,000 crore, Rs 39,000 crore against the same Rs 1,50,000 crore, Rs 30,000 crore against it again, and Rs 825 crore and Rs 990 crore off a rate of 0.55 per cent applied to the two ends. Any of them can be checked with a pen.

And then the reading, the sentence to carry away. The manager's charge read a fifth higher at the end of a period in which the people whose money it is took Rs 9,000 crore back out.

Where does anybody actually use this split?

The two forecast completely differently, so an analyst building a view on a listed manager separates them before doing anything else. A flow figure is a statement about a relationship with the people whose money it is, and relationships tend to persist for a while in the direction they are already going. A market movement is a price, and last period's price move says close to nothing about next period's. Adding them and projecting the sum forward treats one durable thing and one undurable thing as though they were the same substance.

A lender sizing a facility against a manager's fee income does the same split for a harder reason. The lender has to ask what the revenue line looks like if the market gives back what it just gave. Strip the market movement out of the run above and Vaidehi Asset Managers Limited is a business whose gathered money shrank by Rs 9,000 crore, and a lender that had underwritten Rs 990 crore of annual charge as though it were a floor has underwritten a number that was standing on a price.

And a person reading a statement of their own holding is doing a version of it too, whether or not they know the words. The value on the statement moved for two reasons: what they paid in or took out, and what the market did to what was already there. Anybody who has ever wondered whether they are actually saving more or the market is just being kind has asked exactly this question. The manager's version has more zeroes on it and is the same question.

Who decides the parts left blank here?