Investors calculate the mutual fund’s performance – its growth over the years – to select a mutual fund for investing. Mutual fund companies exhibit metrics like the growth of their asset under management (AUM) and fund flow as their business strength to attract investors. But these metrics offer very little insight into the actual business performance of the company against its peers and can impact the investor’s ability to make an informed decision.

So, how do you evaluate the current performance of a mutual fund firm? According to a study on assessing mutual fund companies performance, the writer argued that market share and change in market share are more efficient metrics to evaluate the company’s performance.

The research appeared in the Financial Analysts Journal, “A New Framework for Analysing Market Share Dynamics among Fund Families”. The writer described how changes in market share is a metric to determine the strengths and weaknesses of a mutual funds firm. It identified four market performance components that measure market performance and if the company has outperformed or outsold its peers in the same category. It also measured the company’s gain from its exposure in the fund range and groups.

The market share of a mutual fund company is calculated based on AUM. Hence, change in market share also depends on the fund’s performance since inception. A fund gains market share when the total of its return and relative flow, measured by net flow as a percentage of AUM at the beginning of the fund, registers a higher value than the market.

The study breaks changes in market share in four components of business performance.

Category Performance Component

It is derived from the fund’s performance in the category against the market average.

Excess Performance Component

This is a factor to determine the performance against funds of the peer companies.

Category Flows Component

It measures fund flow against the market average in which the fund management company is active.

Excess Flows Component

Excess Flow Component evaluates a company’s performance in the same category against its peers in terms of higher relative flow.

Of the above four categories, Category Performance Component and Category Flows Component determine a company’s performance against the market, while Excess Performance Component and Excess Flows Component gauge comparative performance in the category. But, what do these metrics tell us?

        Category vs. Market Fund vs. Category
Performance Category Performance Component

Determines whether the company is well represented in the category with favourable performance

Excess Performance Component

Compares performance of the company against peers in the same category

Flows Category Flows Component

Determines favourable net flow of the company in the categories it represents

Excess Flows Component

Compares category peers in terms of sales

Conclusion

The study is critical  for fund management companies to analyse their business performance and identify the components driving it to prepare future strategies. For mutual funds investors, performance analysis helps them select an asset management firm with a stronger business performance.

However, these metrics experience large swings when the market is down, or there are periods of heightened volatility.