BOSTON — A San Francisco-based company that says it can help mutual funds cut costs and boost returns through better management of investor cash flows has won its biggest-name client yet — OppenheimerFunds Inc. of New York, the eighth-largest U.S. fund group.
BOSTON — A San Francisco-based company that says it can help mutual funds cut costs and boost returns through better management of investor cash flows has won its biggest-name client yet — OppenheimerFunds Inc. of New York, the eighth-largest U.S. fund group.
“They’re a big one for us to get,” said Alan Seigerman, chief operating officer at ReFlow Management Co. LLC, which was founded by billionaire philanthropist Gordon P. Getty.
Jeaneen Pisarra, spokeswoman at OppenheimerFunds, confirmed that the investment manager is a ReFlow client, but declined to comment further.
Fund managers make two kinds of trades, according to Mr. Seigerman. One type is done to advance an investment strategy. The other, which he calls “operational” trading, is performed to accommodate fund share redemptions and cash inflows, for example, and can sometimes be at odds with that strategy, Mr. Seigerman said.
ReFlow helps managers avoid such non-strategic trading, which can drive up portfolio transaction costs and hurt tax efficiency, he said. When investors unexpectedly redeem fund shares, for instance, managers may have to sell stocks they’d rather keep, in order to raise cash. If those stocks have gains, newer investors who may not have benefited from their rise could end up with a tax bill, Mr. Seigerman said.
In the case of unexpected large inflows, managers may be forced to buy stocks that aren’t optimal, or risk diluting fund returns by holding the new cash in low-yielding cash instruments, he said.
“Some studies have shown that among the most costly trades are those that are done to satisfy flows,” said Russel Kinnel, director of mutual fund research at Chicago-based Morningstar Inc.
“I’ve heard managers say that they spend a lot of time managing those cash flows,” he said. “A manager, instead of doing fundamental research, may spend two or three hours out of the day deciding what kind of cash management trades to make.”
Mr. Getty came up with the concept for ReFlow in 1999, and the Securities and Exchange Commission issued a no-action letter on July 15, 2002, which allowed the company to proceed with its plans to offer liquidity services to fund companies, Mr. Seigerman said. ReFlow executed its first trade in late 2003.
A dozen clients
The firm now counts 12 mutual fund companies as customers, all of which subscribe to its Redemption Service, the oldest of the three services it offers.
The Redemption Service is a system that buys and holds fund shares to give a fund the cash it needs to meet redemptions. ReFlow charges the fund a fee for the service. If a fund subsequently gets inflows, ReFlow sells a corresponding amount of shares back to the fund.
“We save them round-trip trading costs,” Mr. Seigerman said.
ReFlow also offers two other services, which made their debut in December.
“Our Redemption In Kind service recognizes that when we redeem our shares, there might be times when it would be advantageous and transactionally very efficient for mutual funds to deliver shares [of stocks] to us rather than deliver cash,” Mr. Seigerman said.
For instance, if ReFlow bought $20 million worth of a fund’s shares to help the fund cover redemptions, a fund manager using the service may be able to repay ReFlow by transferring securities from the fund rather than using cash to buy back fund shares.
“They get $20 million of mutual fund shares back, and we get $20 million worth of securities,” Mr. Seigerman said, adding that the deal is complete at that stage.
ReFlow’s third service, Client Tailored Equitization enables a fund to “equitize” its cash and get a return based on its net asset value. ReFlow does that through a total-return swap.
“By getting the return on their [net asset value], they capture both the market return and the bright ideas reflected in their portfolio investment strategy,” Mr. Seigerman said.
Houston-based Bridgeway Funds Inc. uses both the Redemption Service and the CTE service, and is in the process of adding the Redemption In Kind service, according to Dick Cancelmo, portfolio manager of the $86 million Bridgeway Balanced Fund (BRBPX) and leader of the trading team at Bridgeway Capital Management Inc., which oversees about $6 billion in total assets.
“It helps us manage flows a little bit better, it helps us manage tax liability and helps us manage trades,” he said, adding that trading less helps keep fund costs down. “It’s a very nice little product, and we think that it can add value for our shareholders.”
