Mutual Fund Transaction Costs Lowered

Terry Flanagan

In June 2011, 12.2 trillion of assets sat in U.S. mutual funds—long-term funds, stock, bond, and hybrid funds, according to the Investment Company Institute. This was a decline of $179.8 billion from 12.4 trillion assets in May.

Redemptions were rampant in 2008 and with investor sentiment in fear mode; it hasn’t been easy for mutual funds, especially against their easily traded ETF counterparts.

“We want to level the playing field between the playing field between mutual funds and ETFs by reducing transactions and taxable distributions and now, offer a redemption in-kind (RIK) service,” said Michael Cagney, chairman and managing principal of ReFlow.

ReFlow provides 1940 Act mutual funds with liquidity services and redemption management. When mutual fund investors wish to redeem shares, mutual fund managers may need to sell holdings to attain liquidity. As liquidity becomes the forefront of a manager’s concern, managing money goes to the backburner.

“We do what’s analogous to the repo market for mutual funds,” said Cagney. Similarly to repurchased agreements in the cash market, ReFlow “takes a position in a mutual fund experiencing large asset outflow” and is repaid a fee at a rate determined through a “daily Dutch auction process”, according to Cagney.

However, Cagney told Markets Media that ReFlow can now redeem its position and may request in-kind shares equivalent value to its redemption rather than cash, which reaps the benefits ETFs have with their creation units, and helps manage capital gains.

Currently, twenty U.S. mutual fund complexes use ReFlow’s services. “Funds need to understand the complexities of our services but we’ve been doing this since 2003, it’s not unproven,” Cagney said. He also cited that ReFlow has approval from the SEC to perform this service for mutual funds; the service is patented.

ReFlow’s RIK service spans over one billion in capital for mutual funds.

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