Liquidity, Mutual Fund Flows, and Reflow Management, Llc

10 Pages Posted: 5 Apr 2010

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Michael Mills

University of Virginia - Darden School of Business

Abstract

This case examines the importance of liquidity to financial markets, using the dramatic volatility of mutual fund flows in 2008 as an example. While the case is targeted to MBA students in an investments or portfolio management course, it is also appropriate for an advanced undergraduate course. It is written from the perspective of a fund manager who has experienced significant redemptions in 2008 and is considering whether or not to use ReFlow Management LLC's "liquidity provision" service. The case requires students to examine the nature and magnitude of mutual fund trading costs; how fund flows may induce additional trading, and how ReFlow's innovative service attempts to resolve these issues. Through this analysis, students will better understand what is meant by the term "liquidity" and how liquidity, or a lack thereof, can negatively impact portfolio performance.

Excerpt

UVA-F-1600

Rev. Aug. 14, 2012

LIQUIDITY, MUTUAL FUND FLOWS, AND REFLOW MANAGEMENT, LLC

The manager of Capital Reserve Small Cap Value Fund, Madeline Annette, examined her most recent performance results. The year 2008 had not been kind to the mutual fund industry, and liquidity—or the lack thereof—appeared to be one of the primary culprits. Although the focus of many investors was on credit market liquidity, Annette was concerned about stock market liquidity.

The most precipitous drop in the market in recent memory had given rise to panicky investors who were selling stocks and redeeming mutual fund shares in order to purchase such less risky assets as treasury bills or to increase their cash holdings. Annette's fund had already experienced redemptions, and she was worried about how this “flight to quality” and the lack of stock market liquidity might affect the performance of her portfolio.

As the manager of an open-end mutual fund, Annette's focus was not just on maximizing returns and minimizing risk; she had the added responsibility of providing liquidity to her investors. The Investment Company Act of 1940 created the open-end mutual fund structure to enable investors to pool their assets into a mutual portfolio invested by a professional fund manager.

. . .

Keywords: Liquidity, mutual fund, fund flow, trading costs

Suggested Citation

Evans, Richard B. and Mills, Michael, Liquidity, Mutual Fund Flows, and Reflow Management, Llc. Darden Case No. UVA-F-1600. Available at SSRN: https://ssrn.com/abstract=1583751

Richard B. Evans (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Michael Mills

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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