Merrill Lynch says "market-timers" are likely source of record inflow to junk

By Paul A. Harris

St. Louis, Mo., Sept. 3 - The record inflow to high-yield mutual funds for the week ending Aug. 28 likely came from "market-timers," Merrill Lynch & Co. chief high-yield strategist Martin Fridson told Prospect News Tuesday.

"The huge inflow was largely a function of market-timers who are likely to go back out in another few weeks as their technical indicators change," Fridson said.

The Merrill Lynch chief high yield strategist also told Prospect News that some funds are identified with market-timers. "This isn't 'official'," he added. "But it's just apparent over time and by informal testimony of the fund managers. So you look at those funds' flows in particular.

"Leaving that aside there wasn't any fundamental news to justify a sudden influx of capital to the high yield funds. Technical indicators pointed in that direction, though."

In its report published Aug. 30 titled "Mutual Funds Post Record Inflow," Merrill Lynch stated that high-yield mutual funds "enjoyed an all-time record inflow during the week ending August 28, 2002, according to AMG Data Services."

Merrill Lynch went on to state that the reporting funds took in $1,556.2 million (2.48% of assets), shattering the previous record of $1,378.0 million (1.98% of assets) in the period ending May 7, 1997.

Furthermore, the Merrill Lynch report stated, the latest week's influx snapped an 11-week string of outflows.

"Underlying figures reported by AMG, as well as other market sources, corroborate the inference that the funds commonly utilized by timers took in large amounts of cash in the latest period," the report stated, adding that some funds actively discourage participation by market-timers.

The Merrill Lynch report went on to state that rather than "aggressively moving into high yield a month ago, when our econometric model already indicated that the sector was extremely undervalued in fundamental terms, the timers apparently waited for the price trend to turn favorable. The yield and spread-versus-Treasuries of the Merrill Lynch High Yield Master II Index reached their recent maximums on August 14, at 13.65% and +961 basis points, respectively. By August 21, the day before the latest AMG reporting period began, those figures had come down to 13.43% and +924. On the same day, our own technical timing model began flashing a 'BUY' signal."

The report concluded that market-timers "evidently jumped on the bandwagon at that point, producing the high yield sector's largest one-week inflow ever."

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