SUMMARY

INVESTOR BEHAVIOUR


The mission of Trounceflow is to deliver truth about the behaviour of investors and the impact that investor behaviour has on asset prices.
To get your head around this, you are going to need to understand some of the relevant concepts, so we've explained them here. Depending on your background, you might benefit from some basic training from finance and economics to get you going.
We're interested in what works in practice, not in theory, so we explain some of the practical matters and empirical findings. And by what works, we mean how does this make you money, so we introduce some of the trading strategies here.


SUMMARY

INVESTOR BEHAVIOUR: CONCEPTS


In an ideal world, we would know which investors held which assets, and how that changed through time. We would know how investors are positioned: their actual holdings relative to some sort of neutral or baseline.

In the real world we lack all this information and have to work our way towards this, and in this section we explain some of the things that we use to do that. They tend to be quantity data, meaning they can have a stock - a quantity at a point in time - or a flow - a rate of change of a quantity through time. The key point about them is that they are, broadly speaking, available. They are there and can be used.


CONCEPTS

Flows

  • TOPICS

  • Positions

  • TOPICS

  • CONCEPTS: FLOWS

    WHAT ARE FUND FLOWS?




    Fund flows: if a UK-domiciled investor puts £10,000 into a UK-domiciled mutual fund focused on emerging market sovereign debt, that's obviously a financial transaction, and so this generates flow data, but net subscriptions to, or redemptions from, mutual funds and ETFs take the particular name fund flows to emphasise that it is the fund that is being bought or sold (and not the individual securities that the fund holds).

    CONCEPTS: FLOWS

    WHAT ARE THE FLOW OF FUNDS ACCOUNTS?




    Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets:

    • The aggregate assets and liabilities for financial and nonfinancial sectors, and

    • What sectors issue and hold financial assets (instruments) of a given type.

    CONCEPTS: FLOWS

    WHAT ARE PORTFOLIO FLOWS?



    Portfolio flows are cross-border transactions in financial assets: flows of money and assets across borders. If a UK investor buys bonds or equities from a US holder, that's a portfolio flows.

    Portfolio assets are things like bonds and equities. Economists use the phrase portfolio flows specifically to mean the cross-border flows, and these they record in the balance of payments.

    CONCEPTS: FLOWS

    WHAT ARE CAPITAL FLOWS?



    Capital flows: this term covers all the cross-border transactions, not only the portfolio flows, but foreign direct investment (e.g. when a controlling interest, not just a share in something, is traded) and other investment flows - the (foreign) capital which flows into banks and other financial institutions.

    To read a technical document from the IMF on tracking capital flows, click here

    CONCEPTS: POSITIONS

    POSITIONING AND LIQUIDITY



    The market is like a large movie theater with a small door. And the best way to detect a sucker is to see if his focus is on the size of the theater rather than that of the door.


    Nassim Nicholas Taleb,
    Skin in the Game: Hidden Asymmetries in Daily Life

    CONCEPTS: POSITIONS

    WHAT ARE FUND ALLOCATIONS?


    Fund allocations: the asset allocations of mutual funds and ETFs at a point in time are a form of positioning data. If the weighted average allocation of a large group of foreign-domiciled asset management companies' dedicated emerging market debt funds to South African government debt is below the weight of South Africa in the benchmark index those funds follow, then we say directly that that group is underweight. It might be that, if we see large bond portfolio outflows from South Africa, that that group is reducing allocations to South Africa, but there might be another explanation, for example selling by funds not dedicated to emerging market debt. Positioning data speaks more directly than flow data here.

    CONCEPTS: MARKET STRUCTURE

    WHAT IS MARKET STRUCTURE?


    Market structure: the composition of the holders of portfolio securities at a point in time are a form of positioning data. Different holders have different motivations and different constraints and these give rise to different behaviours. You can arrive at positioning by knowing about the different investors in a market (market structure) and how they are positioned (e.g. through their asset allocations).

    CONCEPTS: MARKET STRUCTURE

    FOREIGN INVESTORS



    The behaviour of foreign investors can a big impact on the price of bonds issued by emerging market sovereigns. If foreigners suddenly start to demand more bonds from Nigeria, Colombia, Romania, Sri Lanka, Pakistan, Egypt or the Ukraine, for example, prices can react strongly. This is not so much the case in larger EM bond markets like Brazil or Mexico.

    CONCEPTS: MARKET STRUCTURE

    LOCAL INVESTORS



    The behaviour of local investors can have a big impact on asset prices. Some markets have large local institutional investors bases, e.g. South Africa or Brazil.


    SUMMARY

    INVESTOR BEHAVIOUR: IN PRACTICE


    In practice there are some issues to do with using fund flow, fund allocation, portfolio flow and other datasets. The data can be biased, or incomplete, or not categorised properly, or have other problems. There is a choice of data providers.

    In Practice

    Flows

  • TOPICS

  • Positions

  • TOPICS

  • IN PRACTICE: FLOWS

    FUND FLOWS


    Trounceflow makes fund flow data.

    IN PRACTICE: POSITIONS

    FUND FACTSHEETS


    Mutual funds and ETF's publish fund factsheets that set out the asset allocation of the fund.

    These explain the detailed allocations to such things as countries, currencies, sectors, industries, credit rating types, as well as give the levels of cash allocations and the weighted average yield and duration of the fund.

    They are published with a lag. In general, sufficient are published 2-3 weeks after the end of the month, and we publish our average allocations data on the 18th of the following month, i.e. on the 18th August we will publish allocations for 31st July.

    IN PRACTICE: POSITIONS

    USING AVERAGE FUND ALLOCATIONS


    We calculate average allocations as the average of the sample of available data.

    For example, if we find allocations to the Mexican Peso on 35 fund factsheets, then we report the average allocation as the mean of that sample.

    The allocations themselves are reported as absolute percentages (for example 9.9% or 8.4%). Average allocations can be calculated for allocations to countries, currencies, duration, yield, cash and credit ratings.

    Different definitions of the variables are used to calculate the averages (e.g. Average yield includes YTM, average yields, etc..). Credit ratings average allocations do not sum to 100% as funds often report their allocations in bands, whereas we calculate averages across specific credit ratings.

    IN PRACTICE: POSITIONS

    BIASES WHEN USING AVERAGE FUND ALLOCATIONS



    Since many funds only report their top 10 country allocations on their factsheets, this produces allocation data which has an upward selection bias as we are more likely to include a country’s allocation if it has a higher allocation. This is more pronounced for countries that have a lower weight in the benchmark.

    We also calculate average allocations that assume that funds not reporting their allocation for a country have a zero allocation or the same allocation as the benchmark. The closer these values are together, the more confidence we have in the allocation.

    IN PRACTICE: POSITIONS

    PRICE-BASED MEASURES (FUND BETAS)


    Inferring positioning in risk factors from performance:

    It is possible to “back out” or make inferences about positioning using price data (total return data). The performance of a fund - the total return over 1 (3, 5 and 10) year(s) – can be compared to the performance of the benchmark index.

    If the fund has outperformed the index during a period when riskier assets outperformed less risky assets, then we can infer that the fund’s positioning was “risk-on”.

    The fund must have been overweight the bonds which increased in value more than average – the riskier bonds - and underweight the bonds which increased in value less than average – the less risky bonds.

    IN PRACTICE: POSITIONS

    BOND INDICES

    In our decomposition of investors of emerging market local currency government bonds, we made a major distinction between dedicated and undedicated investors, defining dedicated investors as those that are benchmarked to JPMorgan GBI-EM (or EMBI in the hard currency universe).

    The FTSE World Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, and investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently includes sovereign debt from over 20 countries, denominated in a variety of currencies, and has more than 30 years of history available. The WGBI provides a broad benchmark for the global sovereign fixed income market. Sub-indexes are available in any combination of currency, maturity, or rating.

    The Bloomberg Barclays Global Aggregate Index (Global Agg) includes treasury, government-related, corporate and securitized fixed-rate bonds from investment grade developed and emerging markets issuers.

    If the local sovereign debt of a currency is not eligible for the index, then no other securities denominated in that currency will be eligible, regardless of the securities’ issue-level ratings.

    The Bloomberg Barclays US Aggregate Bond Index includes investment grade, US dollar-denominated, and fixed-rate Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and nonagency).

    The Bloomberg Barclays Multiverse Index provides a broad based measure of the global fixed income bond market. The index is the union of the Global Aggregate Index and the Global High Yield Index as it represents investment grade and high yield bonds in all eligible currencies.

    The J.P. Morgan GBI EM series provides a comprehensive measure of local currency denominated, fixed rate, government debt issued in Emerging Markets. The three main composite indices are GBI-EM, GBI-EM Globaland GBI-EM Broad, each having a Diversified version.

    The J.P. Morgan EMBI Global/ EMBI Global Diversified series comprises of USD denominated Brady bonds, Eurobonds and Traded loans issued by sovereign and quasi sovereign entities. The Diversified version limits the weights of the index countries by only including a specified portion of those countries' eligible current face amounts of debt outstanding

    The J.P. Morgan CEMBI/CEMBI Broad index series was created in response to investor demand for a liquid global emerging market corporate benchmark and the rapid increase in corporate issuance. The Diversified versions of the CEMBI/CEMBI Broad indices limits the weights of the index countries by only including a specified portion of those countries' eligible current face amounts of debt outstanding.

    The J.P. Morgan Asia Credit Index (JACI) measures the performance of Asia ex Japan USD denominated bond market. JACI provides a benchmark for investment opportunities in fixed and floating rate US dollar-denominated bonds issued by Asia sovereigns, quasi-sovereigns and corporates.

    The J.P. Morgan Next Generation Markets Index tracks USD-denominated debt issued by sovereign and quasi-sovereign next generation issuers. The index provides a benchmark for the smaller, less liquid population of emerging market credits, where investment opportunities in external debt markets are limited relative to the larger, more traditional emerging economies where external debt issuance is frequent and large

    IN PRACTICE: POSITIONS

    WGBI INCLUSION/EXCLUSION EFFECT ON FLOWS


    Malaysia's addition to the watchlist for WGBI exclusion, anticipation of South Africa's downgrade and exclusion from WGBI and China's imminent inclusion to WGBI are recent events that have triggered stories about the passive flows that could arise from inclusion/exclusion.

    Analysis is in the form of multiplying the country's (expected) weight in the index by the AUM benchmarked to the index to calculate the potential in/outflow. $2-2.5tn is regularly thrown out as the amount tracking WGBI - which is apparently very passive.

    Searching our database of over 1,000 Global Bond funds only finds a fraction of this, even less of which is passive:

    A common rebuttal is that a lot of this money is held by Japanese investors who blindly follow the WGBI. While it is true that the Government Pension Investment Fund (GPIF) had USD 330bn in its foreign bonds portfolio, which is benchmarked against WGBI, there is little evidence of more money being held by Japanese funds.

    Fund AUM ($ bn) Passive
    Japanese GPIF 337.39 Unknown
    Templeton Global Bond Fund/United States 26.89 No
    DFA Five-Year Global Fixed Income Portfolio 15.20 No
    DFA Two-Year Global Fixed Income Portfolio 5.80 No
    Hartford World Bond Fund 5.50 No
    UBS CH Institutional Fund - Global Bonds Passive II hedged CHF 2.98 Yes
    Legg Mason BW Global Opportunities Bond Fund 2.95 No
    iShares Overseas Government Bond Index Fund (UK) 2.55 Yes
    Xtrackers II Global Government Bond UCITS ETF 2.42 Yes
    DoubleLine Global Bond Fund 1.15 No
    HSBC Global Funds ICAV - Global Government Bond Index Fund 1.05 No
    SA Global Fixed Income Fund 0.80 No
    iShares Global Government Bond Index Fund 0.45 Yes
    AST Templeton Global Bond Portfolio 0.33 No
    Next Funds International Bond Ftse World Government Bond Index ex Japan Unhedged ETF 0.05 Yes

    IN PRACTICE: DATA PROVIDERS

    PROVIDERS


    Provider Fund allocations Fund flows
    Portfolio flows
    Market structure
    Trounceflow Daily
    IIF
    JPMorgan Research Survey data EPFR
    Bank of America Monthly
    Other Sell-side Research EPFR
    Morningstar Monthly
    Refinitiv Lipper
    Bloomberg ETF only
    IMF
    Macrobond
    Crowdthnk
    BNY Mellon
    BIS Locational Banking Statistics
    BIS Consolidated Banking Statistics
    KP dataset

    IN PRACTICE: DATA PROVIDERS

    PROVIDERS


    Provider Flow Stock Asset Allocation
    Fund Flows Portfolio Flows Capital Flows Public Debt External Debt Market Structure Dedicated Undedicated
    Trounceflow
    IIF
    JPMorgan Research EPFR
    Bank of America
    Other Sell-side Research EPFR
    Morningstar Monthly
    Refinitiv Lipper
    Bloomberg ETF only
    IMF
    Macrobond
    Crowdthnk
    BNY Mellon
    BIS Locational Banking Statistics
    BIS Consolidated Banking Statistics
    KP dataset

    IN PRACTICE: DATA PROVIDERS

    FLOWS & POSITIONS DATA VENDORS

  • Data Provided

  • EPFR Global is a brand owned by Informa PLC, a FTSE-100 listed UK company, as part of their Informa Intelligence Division. Informa acquired EPFR Global in 2010. EPFR provides fund flow data with a one-day lag and fund allocation data with a 23-day lag.

  • Data Provided

  • Founded in 1973 as Lipper Analytical Services, it was acquired by Reuters in 1998. Following the merger of Thomson Financial and Reuters in April 2008, Lipper became part of Thomson Reuters.

  • Data Provided

  • Under Construction!

  • Data Provided

  • Under Construction!

  • Data Provided

  • The Institute for International Finance (IIF) is the global association of the financial industry, with close to 500 members from 70 countries. IIF members include most of the world's largest commercial banks and investment banks, along with a number of insurance companies and investment management firms. Associate members include multinational corporations, trading companies, export credit agencies, and multilateral agencies.

    Some hedge funds are members; many are not.

    It has a research department that not only provides briefings but which manages macroeconomic and financial databases, including capital flows and debt. These are only accessible for members.

  • Data Provided

  • The International Monetary Fund hosts a number of databases. One, the Balance of Payments (BOP), contains balance of payments and international investment position data of individual countries.

  • Data Provided

  • Under Construction!


    IN PRACTICE: ACADEMIC RESEARCH

    Push Factors and Capital Flows to Emerging Markets


    Why Knowing Your Lender Matters More Than Fundamentals?

    Author/Editor: Cerruti, E., S. Claessens, and D. Puy (2015)
    Series: IMF Working Paper 5/127, Washington, DC

    Summary:

    EMs need to closely monitor their lenders and investors to assess their inflow exposures to global push factors...EMs with deep financial markets and a high exposure to “fickle investors,” rather than those with more sound institutional or macroeconomic fundamentals, should expect to receive (or lose) external funding when financial conditions in advanced countries improve (or deteriorate)...borrowers’ fundamentals do matter...countries with macroeconomic or institutional deficiencies tend to receive less capital inflows...but the traditional “push factor” debate may have over-stated the importance of fundamentals in shaping sensitivities to external shocks at the expense of other important determinants...authorities in EMs should put efforts into collecting information about their foreign investor base and the role of large funds (or asset management companies) in it.



    IN PRACTICE: ACADEMIC RESEARCH

    Multi-Sector Bond Funds Risks in Emerging Markets


    Do Multi-Sector Bond Funds Pose Risks to Emerging Markets?

    Author/Editor: Fabio Cortes, Luca Sanfilippo. (2020)
    Series: IMF Working Paper 20/152 , Washington, DC.

    Summary:

    "Emerging economies in the post-crisis period increasingly saw portfolio debt inflows from a type of large international investment fund: Multi-Sector Bond Funds (MSBFs). These investors have lacked adequate representation in the literature. This paper constructs a new detailed database from micro-level MSBF emerging market (EM) holdings from 2009:Q4–2018:Q2. Exploiting this data, the paper assesses the risks they pose to the financial stability of specific emerging bond markets. The data shows that MSBFs are highly concentrated–both in their positions and their decision-making. The empirical results further suggest that MSBFs exhibit opportunistic behavior (and more so than other investment funds). In periods of high risk aversion, large MSBF portfolio reallocations out of EMs can be associated with underperformance of the same markets, signaling the importance of monitoring their footprint and better understanding their asset allocation decisions."


    IN PRACTICE: ACADEMIC RESEARCH

    Differential Treatment in the Bond Market




    Sovereign Risk and Mutual Fund Portfolios

    Author/Editor: Converse, Nathan, and Enrico Mallucci (2019)
    Series: International Finance Discussion Papers 1261.

    Summary:

    "The results are supportive of models of sovereign default that assign a nontrivial role to the preferences of international creditors."


    IN PRACTICE: ACADEMIC RESEARCH

    Capital Flow Data


    A Guide for Empirical Analysis and Real-time Tracking

    Author/Editor: Robin Koepke; Simon Paetzold

    Summary:

    • A guide for academics who embark on empirical research projects and for policymakers who need timely information on capital flow developments to inform their decisions
    • We address common misconceptions about capital flow data and discuss differences between high-frequency proxies for portfolio flows
    • High-frequency proxies have significant predictive content for portfolio flows from the balance of payments (BoP)
    • We also construct a new dataset for academic use, consisting of monthly portfolio flows broadly consistent with BoP data.

    IN PRACTICE: ACADEMIC RESEARCH

    The Role of Benchmark-Driven Investors


    Emerging Market Portfolio Flows : The Role of Benchmark-Driven Investors

    Author/Editor: Serkan Arslanalp and Takahiro Tsuda (2015)
    Series: Working Paper No. 15/263

    Summary:

    "Portfolio flows to emerging markets (EMs) tend to be correlated. A possible explanation is the role global benchmarks play in allocating capital internationally, the so-called “benchmark effect.” This paper finds that benchmark-driven investors indeed play a large role in a key segment of the market—the EM local currency government bond market—, accounting for more than one third of total foreign holdings as of end-2014. We find that the prominence of these investors declined somewhat after the May 2013 taper tantrum, but remain high. This distinction is important in understanding the drivers of EM capital flows and their sensitivity to different types of shocks. In particular, a high share of benchmark-driven investors may result in capital flows that are more sensitive to global shocks and less sensitive to country factors."


    IN PRACTICE: ACADEMIC RESEARCH

    Drivers of Capital Flows to Emerging Markets


    What Drivers Capital Flows to Emerging Markets? A Survey of the Empirical Literature

    Author/Editor: Robin Koepke

    Summary:

    This paper reviews the rapidly growing empirical literature on the drivers of capital flows to emerging markets. The empirical evidence is structured based on the recognition that the drivers of capital flows vary over time and across different types of capital flows. The drivers are classified using the traditional “push vs. pull” framework, which is augmented by a distinction between cyclical and structural factors. Push factors are found to matter most for portfolio flows, somewhat less for banking flows, and least for FDI. Pull factors matter for all three components, but most for banking flows. A historical perspective suggests that the recent literature may have overemphasized the importance of cyclical factors at the expense of longer-term structural trends.


    IN PRACTICE: ACADEMIC RESEARCH

    Update on Benchmark-Driven Investors


    Benchmark-Driven Investments in Emerging Market Bond Markets - Taking Stock

    Author/Editor: Serkan Arslanalp, Dimitris Drakopoulos, Rohit Goel, and Robin Koepke

    Summary:

    First, we provide an overview of how key EM bond benchmark indices are constructed, how they affect the behavior of investment funds, and what are the likely implications for capital flows dynamics. Second, we provide up-to-date estimates of the size of benchmark-driven investments in local EM bond markets, estimated at around $300 billion as of end 2019 before the COVID-19 shock in early 2020 (Figure 2). Third, we provide empirical results demonstrating the heightened sensitivity of benchmark-driven investments to external factors, which leads to an elevated correlation of such flows across countries.


    IN PRACTICE: ACADEMIC RESEARCH

    THE GLOBAL CAPITAL ALLOCATION




    SUMMARY

    INVESTOR BEHAVIOUR: TRADING STRATEGIES


    How do you make money with investor behaviour? Well for a start, don't start there! I think fundamentals are the right place to start. In other words, I think there's a pretty good relationship between asset prices and macroeconomic data, such as consumption or investment. On the whole, people's expectations are right.

    However I think the 'behavioural' approach matters. Sometimes I think people's expectations are wrong. A good narrative takes hold, and I find myself agreeing with other people about things that later on look foolish, in hindsight. But if you can measure how investors are behaving, and you find extremes in positioning, linked to popular narratives, then it's a good reality check.

    Momentum, or other more complicated returns-based strategies, may or may not make sense to you. But if they do, and you can measure flows and positions, then you've got a whole new dimension of measures: you can "go-with-the-flow" in quantities as well as prices.

    Frictions, of three kinds, seem to me to be really important. Segmentation - when investors will restrict themselves to certain preferred assets - and Intermediation - when you delegate an agent, like an asset management company - to manage your assets, and you measure them against an index - create trading opportunities. Understanding market structure is going to help there. Finally Liquidity - or the lack of it - will matter when positioning is skewed.

    ZAR TRY BRL MXN IDR
    Quantitative Fundamentals 1 2 3 1 2
    Qualitative Fundamentals 1 2 1 3 1
    Positioning Score 1 3 2 2 1
    Total Score 3 7 6 6 4

    TRADING STRATEGIES

    GO-WITH-THE-FLOW / MOMENTUM




    Plenty of investors describe their behaviour as *trend following*, which means they follow the trend in prices. Trend following strategies can also be formulated using flows data.

    For example, be bullish / overweight / positive emerging market sovereign debt if there is a trend of inflows to the asset class, and vice versa. Observe fund flows data to see if end-investors are putting money into EMD funds. Observe portfolio flows data to see if developed markets residents are net buyers of EMD from emerging markets.

    TRADING STRATEGIES

    CONTRARIAN / POSITIONING REVERSAL




    In the contrarian strategy, investors short (or go underweight) the crowded trades, and overweight the unpopular trades. Use positioning data to identify what positioning looks like, and take the contrarian view.

    TRADING STRATEGIES

    POSITIONING AND PRICES


    Here's the story of the mechanism of how positioning causes asymmetric responses in price. There are four cases.

    1. If the positioning is 'short' or underweight, and the news is good, there is a 'short squeeze' as many participants try to enter through a narrow door, and prices rise strongly.
    2. If the positioning is 'long' or overweight, and the news is good, there is no such short squeeze. Prices still rise, but significantly less so.
    3. If the positioning is 'long' or overweight and the news is bad, there is a disorderly pullback as many participants try to exit through a narrow door, and prices fall strongly.
    4. Finally, if the positioning is 'short' or underweight and the news is bad, there is no disorderly exit. Prices still fall, but less significantly.

    NARRATIVES

    NARRATIVES, ECONOMICS AND ASSET PRICES


    The field of economics should be expanded to include serious quantitative study of changing popular narratives. We cannot easily prove that any association between changing narratives and economic outcomes is not all reverse causality, from the outcomes to the narratives. But there have been true controlled experiments showing that people respond strongly to narratives.

    Most speculative asset prices are nearly random walks on a day-to-day basis. The reason is obvious: if it were possible for smart money to predict the day-to-day price changes even reasonably well, they could become rich very fast, and they would take over the market. In a bubble, the contagion is altered by the public attention to price increases: rapid price increases boost the contagion rate of popular stories justifying that increase, heightening demand and more price increases.

    Robert Shiller, Presidential address delivered at the 129th annual meeting of the American Economic Association, January 7, 2017

    NARRATIVES

    ARGENTINA




    • Argentina sold USD 2.75 billion of a hotly demanded 100-year bond in U.S. dollars on Monday, just over a year after emerging from its latest default.― 20 Jun 2017
    • Argentina’s century bond caught in dash for exit ― Financial Times, 26 April 2019


    SUMMARY

    INVESTOR BEHAVIOUR: BASIC TRAINING

    BASIC TRAINING: THE INVESTMENT INDUSTRY

    WHAT IS A MUTUAL FUND?


    • A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities.
    • Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.
    • Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
    • Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.
    • the price of a mutual fund share is referred to as the net asset value (NAV) per share
    • A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.
    • Outstanding shares are those held by all shareholders, institutional investors, and company officers or insiders.
    • Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't fluctuate during market hours, but it is settled at the end of each trading day.

    BASIC TRAINING: THE INVESTMENT INDUSTRY

    WHAT IS AN ETF?


    Q.    What is an ETF?

    A.    An exchange-traded fund (ETF) is a pooled investment vehicle with shares that trade intraday on stock exchanges at a market-determined price.

    Q.    So ETF's are like shares?

    A.    Yes, in that you may buy or sell them through a broker just like you would the sharesBut ETF's are pooled investment vehicles. You are getting exposure to many securities, not one.

    Q.    So ETF's are like mutual funds?

    A.    Yes, in that you get exposure to many securities, but no, because traditional mutual fund shares don't trade on exchanges; you purchase or redeem directly.

    BASIC TRAINING: DEBT & THE ECONOMY

    BY TYPE OF ISSUER


    A debt instrument is a financial claim that requires payment(s) of interest and/or principal by the debtor to the creditor at a date, or dates, in the future. Debt securities are negotiable financial instruments serving as evidence of a debt.

    Now, we divide an economy into five sectors* that are resident in the economy.

    So, when we're talking about the debt of an economy, one way we'll be talking about it is by which of the five types of sector is the issuer (the debtor).

    The five sectors are:

    • Nonfinancial corporations
    • Financial corporations
    • General government
    • Households
    • Nonprofits serving households

    What about the Public and Private sectors?

    Well, general government is obviously the public sector. But the public sector also includes those corporations controlled by the government. Then the private sector is everything else.

    THE DEBT OF AN ECONOMY: BY TYPE OF ISSUER (image)

    BASIC TRAINING: DEBT & THE ECONOMY

    BY CURRENCY OF ISSUANCE


    When we're talking about the debt of an economy, a second way we'll talk about it is by which currency the debt is denominated in. There are really just two types:

    • the economy's own currency: the local currency
    • another currency: an external currency

    People talking about debt issued by residents of emerging economies talk about hard currency to mean one of a small group of external currencies including the US dollar, Euro, Yen and Pound Sterling.

    THE DEBT OF AN ECONOMY: BY CURRENCY OF ISSUANCE (image)

    BASIC TRAINING: DEBT & THE ECONOMY

    BY TYPE AND RESIDENCY OF HOLDER


    When we're talking about the debt of an economy, the third way we'll talk about it is by who the type and what the residency of the holder. It's common to talk about the residency of the holder as having two types:

    • domestic (local) holders: residents
    • external (foreign) holders: non-residents

    External Debt is the name for the debt liability of the whole of an economy, both the government (the public) sector, and the corporate and financial (the private) sector, with respect to the rest of the world (the external sector).

    There is a common misperception that external debt is the name for debt denominated in an external currency. Better to call that external-currency debt.

    Debt of an Economy by type and residency of holder

    BASIC TRAINING: THE EXTERNAL SECTOR

    AN ECONOMY'S POSITION TO THE REST OF THE WORLD


    The external sector is the economy's position to the rest of the world. Positions are really stock variables - the situation at a point in time - and we're interested in one particular aspect - to do with financial instruments - of an economy's position to the rest of the world. It's the international investment position, or IIP, which essentially tells you about two things:

    • the stock of 'foreign' financial instruments an economy's residents own - these are assets
    • the stock of 'local' financial instruments owned by residents of other economies - these are liabilities

    Financial transactions between an economy's residents and the rest of the world - i.e. transactions in equities and debt - are called capital flows, and when they occur they change the financial position between the economy and the rest of the world. They give rise to flow data, because we define flows data as the data arising when there's a transaction in financial assets or liabilities. They are often broken down into four types:

    • Residents could buy 'foreign' instruments - e.g. Mexican pension funds buy US government bonds from Canadian pension funds (which would be a bond portfolio inflow for Canada)
    • Residents could sell 'foreign' instruments - e.g. Brazilian hedge funds sell Polish equities to Polish banks (which would be an equity portfolio outflow for Brazil)
    • Residents could sell 'local' instruments - e.g. Danish banks sell Danish government bonds to South African insurance companies (which would be a bond portfolio inflow for Denmark)
    • Residents could sell 'local' instruments - e.g. Danish banks sell Danish government bonds to South African insurance companies (which would be a bond portfolio inflow for Denmark)
    • Residents could buy 'local' instruments - e.g. British banks buy UK Gilts from French asset managers (which would be a bond portfolio outflow for France)

    These transactions are recorded in a countries' financial account, which is part of a larger / broader set of accounts of transactions between an economy and the rest of the world called the Balance of Payments.

    AN ECONOMY'S POSITION TO THE REST OF THE WORLD (image)

    BASIC TRAINING: THE EXTERNAL SECTOR

    FX RESERVES


    The foreign exchange (FX) reserves of an economy form part of the stock of 'foreign' financial instruments owned by an economy / the economy's residents, and as such they form part of the assets side of the international investment position. They are a specific part: that part owned by the public sector (specifically, by the central bank or other monetary authority) owned not as an investment (to grow in value, and eventually be used for consumption) but held to be used as a policy instrument, generally as an instrument to manage the exchange rate.

    Foreign exchange reserves are assets (usually financial assets, especially government bonds) denominated in foreign currencies held by an economy, generally by its central bank.

    BASIC TRAINING: THE EXTERNAL SECTOR

    WHAT IS THE BALANCE OF PAYMENTS?




    The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.


    Glossary

    Glossary Table


    Abreviation Definition
    AMC Asset Management Company
    Asia Debt the asset class that includes Sovereign and Corporate issuers domiciled in Asia.
    CEMBI a family of emerging markets corporate bond indices from JPMorgan. See our dedicated Emerging Market Indices page.
    Clustering Clustering analysis: theory gives a little background on clustering, which is a way of classifying one large set of things into several collections, in which each collection's things are quite similar to each other but not quite so similar to those things in the other collections. For example you might have a large sack of fruit, and you can have a small bag for apples, a small bag for oranges, etc. See our Why clustering page.
    Dedicated funds funds which hold almost all their assets in a single asset class. For example, funds that are "Emerging Market Debt Dedicated"" will hold almost all their assets in the Emerging Market Debt asset class."
    EM Corporate (CEMBI) a category we use internally at Trounceflow for funds dedicated to EM Corporate Debt, and where holdings are largely constrained to bonds eligible for the CEMBI.
    EM Corporate Debt debt issued by an EM corporate.
    EMD Dedicated funds funds that have almost all of their assets in EMD.
    EMD Portfolio Flows capital flows specifically in EM issued bonds (bonds are portfolio assets) across the EM / DM border.
    EM Hard (EMBI) a category we use internally at Trounceflow for funds dedicated to EM Hard Debt, and where holdings are largely constrained to the EMBI.
    EM Local Debt debt issued by an EM sovereign denominated in the local currency. Contrast this definition to GBIEMG*eligible debt, a narrower subset that excludes bills, lessliquid bonds, inflationlinked and floatingrate bonds, and the bonds of some emerging economy sovereigns.
    EM Local Debt Portfolio flows flows between EM and DM of EM Local Debt.
    EM Local (GBIEM) a category for funds dedicated to EM Local Debt, and where holdings are largely constrained to the GBIEMGD composition.
    EM Undedicated a category for funds that may hold debt from more than one EM Debt Sector. Sub categories include EM Undedicated (Blend), EM Undedicated (Total Return) and EM Undedicated (Short Duration).
    External debt debt held by nonresidents. It can be denominated in local or foreign currency. External debt can also be public debt (central or general government) or private debt.
    Foreign currency debt (hard currency debt) debt issued in a currency other than the local currency of the country. Typically it is in USD, EUR or JPY. Similarly, it can be public debt (central or general government) or private debt.
    Fund Flows the net subscriptions to, or redemptions from, mutual funds.
    Portfolio Flows crossborder transactions (capital flows) in portfolio assets, like bonds and stocks.
    Separately Managed Accounts investment vehicles of asset management companies that are managed separately from pooled vehicles like mutual funds and ETF's. Often used by large investors (e.g. state pension funds) who have very specific mandates, and for whom the asset management companies' standard products (mutual funds and ETF's) are not appropriate.
    Undedicated Asia Debt funds funds which may hold debt from more than one EM Debt Sector; they may be Constrained to hold a blend of sectors in a certain ratio, or Unconstrained in their allocation to EM Debt Sectors.
    Undedicated funds funds which may hold debt from more than one EM Debt Sector; they may be Constrained to hold a blend of sectors in a certain ratio, or Unconstrained in their allocation to EM Debt Sectors.
    Crore/Koti denotes ten million (10,000,000 or 107 in scientific notation) and is equal to 100 lakh in the Indian numbering system. It is written as 1,00,00,000 with the local style of digit group separators (a lakh is equal to one hundred thousand and is written as 1,00,000).