Todd Willits: “Foreign investment into Japan is a major driver of performance”

Following a highly successful Tokyo Hedge Funds Club Dialogue Luncheon focused on fund flows and asset allocation data, the Hedge Funds Club’s Stefan Nilsson checked in with EFPR’s CEO Todd Willits in Boston.

You recently visited Japan to participate in a Tokyo Hedge Funds Club Dialogue Luncheon event. Did the conversation around the lunch table take any unexpected turns or was it the usual topics and questions that came up?

It was really refreshing to be in a room with so many individuals who are keyed into what we do at EPFR. The questions we answer around how assets are moving around the world, and the implications of those movements, are preeminent macro drivers in the minds of most of the Hedge Funds Club attendees, so we delved into some topics that we were familiar with. I’d say some of the unexpected topics were listening and learning opportunities for us: the opinions that were shared on the long-term outlook for the Japanese financial markets, the different ways of thinking about asset movement in the context of different types of investment vehicles, and the increasing importance of ESG factors in investing decision making.

During your Japan visit, you also had meetings with many Japanese clients and prospects. Did you spot any trends in what Japanese firms are looking for when it comes to fund flows and asset allocation data?

There were quite a few trends that emerged in conversations with clients and prospects in Japan. An observation we’ve had for quite a long time has rung true once more for our clients: foreign investment or flows into Japan is a major driver of performance in the market. I think that came up in almost every conversation we had in June, and our clients saw that play out in the first half of the year and were able to capitalise on the shift. There was also interest in a sector view of asset movement, particularly any key rotations between sectors; the topic of security-level momentum and crowding factors; action being taken in the market to encourage more investment into mid-cap and small-cap companies.

Do you see big regional differences in how your clients use data?

Not particularly. On the extreme of data usage, the quantitative clients that we work with share many similarities, and are often global in nature, so big regional differences don’t really exist in those situations. Certainly, with more regional investment banks, there are different approaches and experiences with data; more and more we are getting asks for processed, synthesized offerings that some of the bulge bracket banks do in-house. That said, I think it’s more about the size of a firm, rather than the region.

You must have come home to Boston with a suitcase full of feedback, questions and ideas from your many conversations in Japan. What do you actually do with that kind of first-hand research?

Great question. I want to make sure we’re incorporating the voice of the client, so I try to circulate as much as possible to individuals in the organisation who can take actions off the back of the feedback first. Obviously, our research team needs to know what’s on the minds of our clients, so we certainly have conversations with them about the trip. We leverage this research in several other ways to improve our products and services, build stronger relationships, and even innovate: it informs our product changes, improves our customer service policies, helps to inform new product development, and enhances our education and training.

Recent times have brought uncertainty to markets across the globe. Has this had any impact on the interest in the kind of data your firm offers?

Clients have always used our data to analyse investor and fund manager sentiment, but more and more we’re seeing it used for things like measuring crowding in individual equities, which can play a critical role in risk management. With the market fluctuations over the past few years, we’re seeing interest in using our data to better time entry and exit from specific names, sectors, or countries. Finally, rising interest rates have driven a lot of interest in the granular money market data we provide through our iMoneyNet product line.

What’s your prediction for the importance of this kind of data to fund managers and investors in the coming years?

We know that the data we provide is critical to the investment process at this point; in the most basic sense, you need to understand where momentum is leading so you don’t get caught on the wrong side of major shifts and inflection points. I think there’s always this long arc toward more granularity in market data, so I would expect that more clients would look to integrate our security-level data over the next few years. It’s a different lens to look at demand and supply questions for these securities, and as we see global markets become more and more intertwined, I think those sorts of views are going to become must-haves for most global investors to not only find increased returns but minimise downside risk. Certainly, themes like ESG investing are not going anywhere any time soon, so using our data to view that trend will become more important over the upcoming years.

EPFR is a leading provider of fund flows and asset allocation data.