Commerz harnesses fund flow data for new prop index

Commerzbank has launched a family of investable indices based on fund flow data from EPFR global. The indices track systematic strategies that leverage the predictive power of fund flow data to make asset allocation decisions, according to Jaime Uribe (pictured), co-head of financial institutions marketing, equity markets and commodities at Commerzbank. “The idea to develop EPFR indices came from our cross-asset research team,” said Uribe. “This team has been using EPFR data for some time now and they have found it to be a good indicator as EPFR tracks $24tr of assets in the mutual funds market globally.”

The data is not about performance but about capital flows in the funds market, said Uribe. “Those funds cover a very large universe of assets, including equity, fixed income and also a variety of approaches (regional, sector),” said Uribe. “The data is used by central banks (as one of the indicators to dictate monetary policy, for instance), but is also used by other institutional investors for decision making or asset allocation.”

Fund flows represent cash going in and out of mutual and exchange-traded funds (ETFs) and the obligation that asset management companies and ETF providers have to report the assets they manage within regulated funds. “Because the data from EPFR is very granular, asset managers can use the indices to fill a gap in their portfolio allocation on one particular sector, but also to get leverage or protected exposure to the same index,” said Uribe. “The data can meet different investment needs around diversification, hedging and so on.”

The indices are equity and cross-asset and have generated more than 10% annualised returns in back tests and are available in volatility-control variants for more risk conscious investors, said Uribe.

The indices are aimed at a diverse client base in a number of instruments and wrappers, including OTC products, certificates, warrants and mutual funds. “We are in talks with a number of asset managers that are using this data in their investment processes and the feedback pointed at the need to have a reference for this data in the form of an index,” said Uribe. “We are developing structures with institutional investors linked to these indices. Some clients are deploying just the strategy without any derivatives outlay and others are interested in more traditional structures with other elements such as volatility, long/short.”

The indices can provide an alternative source of risk premia to that offered by smart beta strategies, said Uribe. “As investor interest has grown, there has been a number of smart beta product launches in recent months and years,” said Uribe. “But a vast majority of these smart beta indices provide exposure to already identified risk factors, like quality, value and momentum.”

When deciding on tactical asset allocation, investors often support their decision-making by using a scoring system that ranks assets according to various momentum, valuation or risk criteria, said Bernd Meyer, head of cross-asset research at Commerz in a statement. Commerz has not started public distribution around the new indices. “Traditionally, the users of EPFR data were institutional investors or money allocators,” said Uribe. “However, the data is very simple and once distributors see the value of the indices we believe there will be demand from retail.”

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Commerz harnesses fund flow data for new prop index