EPFR Preps Flows-Based Allocation Models

Boston-based funds flows data provider EPFR Global is building a series of country- and region-based asset allocation models to drive adoption of its data as an input to investment strategies and to make it easier for potential clients to build the data into their models.

The models will allow investors to overlay or underlay funds flows data on top of benchmark indexes—initially for FTSE and MSCI emerging market equities indexes—enabling them to assess how the adapted models outperform the benchmarks, and determine how the flows data impacts returns, and what level of allocation they should base on the flows data.

Simon Ringrose, managing director of sales at EPFR, says the models will help validate the value of the vendor’s data, while allowing firms that already recognized the value of the data but didn’t have the quantitative resources to use it to build flows data  into their investment strategies, or for others to use it as a check for their existing models.

“We continue to see clients using our data more in the investment process and for asset allocation and setting investment rules… but we haven’t really used the data ourselves, and we wanted to perform some internal back-testing looking at ways to use the data that clients could refer to, without needing to read a whole research report,” Ringrose says. “We wanted to develop factors that allow clients to optimize their investments based on flows data. For example, inflows and outflows move markets up and down, respectively, so being able to track that is useful for measuring investor demand for different countries.”

To build the models, EPFR has enlisted Adam Longenecker, founder of Florida-based investment consulting firm AHL Investment Resources, who had already worked with the vendor’s data during his MS in Finance program at the University of Florida. “We continue to focus on the business of data collection and aggregation, and we don’t want to get distracted from that. And with Adam, we needed the quantitative analytical skills that we didn’t have in-house. Our core team is data collection and aggregation,” Ringrose says.

Longenecker says the models will provide model alpha on a weekly or monthly basis, overall return, access return, and returns net of transaction costs, and tracking error, and will provide active, passive and default strategies for each model, capturing EPFR’s country flows and country allocations data, and adjusting the allocations up or down based on the activity of the flows data itself. Buy-side clients who don’t already use flows data in their models can use these off-the-shelf models to create their own strategies that incorporate the data, while sell-side firms can use the models to compare benchmarks to their returns, to market their services to buy-side clients.

EPFR has yet to decide delivery and commercial models, though Longenecker says the vendor could offer three potential delivery models—an interactive model for users to create their own strategies by tweaking EPFR’s framework, a static report indicating the optimal rebalancing that could be emailed to clients as a PDF on a weekly or monthly basis, or a front-end interface that would display the data but would not allow users to incorporate their own data.

Ringrose says EPFR sees demand from new clients among wealth managers and financial advisers, for whom a simple, static report would be more useful.

“We don’t see ourselves building a separate product line of analytics and models, but we do see these tools… driving data sales going forward,” Ringrose says. “We are still working out the commercial aspects of how we package it… but our strategy is to add value to our data and increase the value of our data to our clients.”

Longenecker says the next step will be to develop regional strategies that would allow users to compare regions against each other and against individual countries, such as Latin America, Eastern Europe or southeast Asia, or to compare emerging markets to developed markets or regions. “We plan to get as granular as possible… and we plan to make this more granular so we can look at regions versus countries, and we also have a global model in development,” he says.