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Fudged Flow Estimates Cause Minimal Problems for Funds

Three weeks ago, January 2002 was the worst January in a decade in terms of equity fund flows. A few days later, January 2002 was a great, $20 billion month.

Mutual fund data provider Lipper had published its monthly release on fund flows stating that a paltry $3 billion had flowed into stock funds in January, which is usually a very good month for the category. It turns out, however, that those estimates were completely wrong.

Not long afterwards, the Investment Company Institute reported the actual flows, or as close to actual flows as is possible, which were nearly $20 billion. It's a large mistake, but does it affect fund companies in any material way?

"We can't see really any ways how something like that would screw up fund companies," said Alyson Riley, a spokeswoman for State Street Research & Management Co.

The press jumps on the first estimates of the month provided by the data companies to illustrate current investor sentiment, but fund firms use of flow numbers is far from immediate. Most companies use the data to identify trends on a longer-term basis, Riley said.

"The overall flow numbers really are not actionable,'" said Avi Nachmany, director of research at Strategic Insight, another firm that provides fund data. Strategic Insight's January estimates of equity flows was $23 billion.

Mostly Consistent

Most of the time, Lipper's estimates are very close to what the ICI's numbers reflect. Last spring, the firm had one month that was off the mark, but beyond that the mistakes are infrequent.

There are two reasons for the inaccurate estimate, said Donald Cassidy, senior fund analyst at Lipper. The first is that Lipper arrives at its estimates by comparing the end of the month assets with those of the previous month, factoring in performance.

That can prove to be an inaccurate method when firms report distributions, which typically happens in January. Some funds report assets as if the distribution has been taken out while others report assets as if the distribution has been reinvested, Cassidy said.

The other factor that could distort Lipper estimates is a great deal of market volatility in the middle of the month. The firm's estimates are generally much more accurate when the equity market is somewhat steady. Januarys inaccuracy was due to a combination of both factors, Cassidy said.

Fly in the Ointment

Mistakes in estimates could adversely affect fund companies using flow numbers for proprietary research, Riley said. While State Street Research does not use Lipper data on fund flows, the firm does place a certain degree of importance on flow numbers.

"We do look at fund flows, to get an idea of current trends and to get some insight into our competition," Riley said. "Still, I don't think fund companies make a lot of business decisions based on a month's flows. Some, but not any very serious ones."

Tracking Flows

Lipper is banking on the notion that fund firms care a lot about monthly fund flows. Last month the firm launched a subscription product for fund companies called the Lipper FundFlow Insight report, a monthly statement with detailed analysis and estimated net dollar investment into each type of mutual fund.

"Research departments at fund firms can now use [the report] to understand their own relative performance and analyze competitive positioning, while strategic planners will use [it] to evaluate the attractiveness of new-fund opportunities," according to literature from Lipper promoting the service.