LIQUIDITY,

MUTUAL FUND U N I V E R S I T Y O F C E N T R A L P U N J A B
FLOWS, AND
[INVESTMENT
ANALYSIS AND PORTFOLIO MANAGEMENT
REFLOW
MANAGEMENT
GROUP MEMBERS
, LLC
AHSAN MUBEEN

CASE STUDY ASSIGNMENT

LIQUIDITY, MUTUAL FUND FLOWS, AND REFLOW MANAGEMENT, LLC

Background:
The manager of Capital Reserve Small Cap Value Fund, Madeline Annette, examined her
most recent performance results and year 2008 was not king to mutual funds industry and
liquidity. Investors were selling stocks and redeeming the mutual funds and started
looking for safe investment like treasury bills. As the manager of an open-end mutual
fund, Annettes focus was not just on maximizing returns and minimizing risk; she had
the added responsibility of providing liquidity to her investors
As a measure of investor protection and a means of ensuring the liquidity of their
underlying investment, the old structure also allowed investors to redeem their shares at
the net asset value (NAV) of the underlying assets.
At a time investor redeem their shares at the net asset value of underlying assets. The
fund manager had 3 business days to repay them in cash.
If redemption exceeded cash on hand that is typically 3% then the manger sold the assets
to meet the investor redemption. If funds received addional inflows manger ended up by
repurchasing the assets they had just sold.

Redemption hit the Annettes portfolio in two ways:

Inflow and outflow caused transaction cost which also decrease the funds for
remaining shareholder
Redemption could force her to sell stock in down market

Trading cost:
The cost associated with trading securities can have a non-negligible impact on portfolio
return.
The total trading cost of a buy transaction is calculated by taking the percentage increase
of the average purchase price as compared to the price when the buy decision was made,
and adding the commissions, fees, and taxes as a percentage of the price when the buy
decision was made.

LIQUIDITY, MUTUAL FUND FLOWS, AND REFLOW MANAGEMENT, LLC

Trading cost has three basic components

Price impact: the largest of the three cost is price impact, which is a measure of a
stock price due to trading. If there is a large sale order the price of stock decreases
Brokerage commission: it is a cost that a manger pay to a broker to execute the
trade.
Bid/ask spread: The bid-ask spread was the difference between the bid price and
the ask price that was given by the market maker.

ReFlowLiquidity When You Need It

ReFlow was the brainchild of billionaire Gordon Getty. Gettys solution was ReFlow,
which for a fee bid on by the fund manager, bought shares in a mutual fund for 28 days as
investors were redeeming their shares. This four-week period allowed managers to wait
out the volatile periods in the market before having to sell their stocks.

To Find Trading Volume We use This Formula:

Trading Volume (%) = ($Purchases +$Sales) / $Total Net Assets

Reflow Service:
ReFlow made the uncommitted portion of this capital available each day to mutual funds
that required its services. Fund managers secured this capital by bidding via Dutch
auction for ReFlow to purchase its shares at the days closing prices. The funds then used
cash from ReFlow to pay departing shareholders and deliver fund shares to ReFlow.
Mutual funds purchased the shares back from ReFlow at any time, either with additional
cash inflows from other investors or with proceeds from the sale of securities
While traditional auctions use sequential bidding, where the good or service is sold to the
highest bidder, a Dutch auction uses simultaneous bidding, where a clearing price is
identified and every participant who bid the clearing price or higher receives the good or
service.

LIQUIDITY, MUTUAL FUND FLOWS, AND REFLOW MANAGEMENT, LLC

Final decision:
Annette in this situation use reFLOWs service as we know that she did not want to incur
additional flow induced trading cost that by using the reflows service may be prevented.
The reFLOWs service offers the mutual funds innovative approaches to handling
shareholder flow and the affordable liquidity that Annette needs. Reflow service funds
used cash from reflow funding to pay its departing shareholders and deliver that fund
shares to reflow. As it provide the liquidity for solving the issue.
It provide the liquidity to offset shareholder redemptions, insulating funds from the
detrimental effect of shareholder flow
When she uses reflow service the only thing which she has wasted is the fee which she
has to pay them for the funds flow. After that she will solve her problem of funds which
she has to pay them their redemption amount for investors and if she does not do then she
has to sell her stocks in the down market and bear a loss for selling stocks at lowest
prices. And she also lost that stocks which could be sold out at higher price in future. But
by this reflow service she has a time to sell her stocks or assets at volatile Price and buy
back that stock within 28 days. All in all she also has much amount of funds to buy more
assets and also had trading cost data to smoothen the flow of funds.

Advantages of Reflows service

Less costly and time consuming than selling securities to raise cash. ReFlow
insulates funds from costs and risks of forced trading, lowering expenses for all
shareholders.
More accessible and cost-effective than lines of credit, which can be hard to secure
and involve significant setup and maintenance fees.
Increases tax-efficiency by helping avoid forced selling due to redemptions.
Proactive and consistent rather than reactive. ReFlow goes into effect without
delay whenever net outflows are experienced.