Junk funds add $45 million, rebounding after year’s biggest loss

By Paul Deckelman

New York, July 9 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – turned mildly higher this week, after having posted their biggest outflow of the year so far the week before.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $45.079 million more had come into those weekly-reporting-only funds than had left them during the week ended Wednesday.

This week’s inflow represented a small improvement after the $2.977 billion outflow reported for the seven-day period ended July 1 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division. It was the biggest outflow seen so far this year, eclipsing the $2.889 billion cash loss recorded during the week ended June 17.

That massive outflow was also the biggest seen since the week ended Dec. 17, 2014, when $3.084 billion more left the funds than came into them.

This week’s inflow, meanwhile, was the second seen over the past three weeks, including the $621 million cash addition during the week ended June 24.

But those two inflows have been the exception to the generally negative recent rule, with outflows having now been posted in three weeks out of the last five and, longer term, in eight weeks out of the last 12, according to a Prospect News analysis of the figures.

Year’s net inflow improves

Just over the halfway mark of 2015, with 27 weeks in the books so far this year, the current week’s inflow marked the 15th such weekly cash gain, versus 12 cash losses since the year began.

It raised the year-to-date net inflow total to $1.257 billion from $1.212 billion last week.

The year-to-date total remains well below the $11.476 billion seen during the week ended April 15, the peak cumulative inflow total so far.

Two outflows were seen in the first three weeks of 2015, starting the cumulative fund flows figure for the nascent year off in the red. It only got back into the black in late January, according to the Prospect News analysis of the data – but it has stayed in positive territory ever since then.

In 2014, inflows had been seen in 31 weeks, versus 21 weeks of outflows, the analysis indicated.

However, despite that roughly 3-to-2 numerical edge for the inflows, cumulative fund flows for the year were negative, finishing the year $6.27 billion in the red.

Cumulative fund-flow estimates may be revised upward or downward or they may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

EPFR sees an outflow

Another fund-tracking service, the Cambridge. Mass.-based EPFR Global, meanwhile saw an outflow of about $1 billion, a market source said.

It was the fifth consecutive outflow seen by the service, following last week’s $3.5 billion cash hemorrhage.

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s solely domestic orientation.

While the two services’ respective weekly results usually point pretty much in the same direction, that hasn’t always been the case; besides this week’s divergence, there had also been a divergence during the week ended June 24, when EPFR saw an outflow of less than $70 million, versus the aforementioned $621 million cash gain seen by AMG/Lipper.

Earlier in the year, there were two weeks during which EPFR had seen inflows and AMG/Lipper had reported outflows – during the week ended May 27, with EPFR showing an inflow of a little more than $400 million while AMG/Lipper recorded a $111.1 million outflow, and during the week ended April 22, which saw EPFR posting a $375 million inflow, while AMG/Lipper was recording a $162.2 million outflow. The net effect of those four relatively uncommon divergences, has been that the two services – whose results had been in tandem from the start of the year until the week ended April 22 – are now back in harmony, with EPFR having also now seen 15 inflows so far this year, against 12 outflows, according to a Prospect News analysis of its figures.

The two services also both saw inflows in 31 weeks versus 21 outflows last year, although in the course of reaching those totals, there were some rare weeks when AMG/Lipper showed outflows while EPFR saw overall inflows, or vice versa.

Inflows propel primary

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming into or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable – more so than those of other, larger cash sources – and they thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk from all sources has been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years.

Although secondary market performance did turn erratic during the 2014 third quarter after a strong start, and deteriorated over several weeks late in the year, declining sharply in line with big energy-sector losses, last year’s new issuance ran slightly ahead of 2013’s near-record pace for much of the latter part of the year, only to finally fall a little behind the year-earlier totals as the year came to a close.

Earlier this year, with inconsistent and indecisive fund flows, the secondary market initially struggled, producing only modestly positive results. After that, the market seemed to find its footing, with year-to-date returns seen to have pushed above the psychologically significant 4% mark by the end of May. But June and early July saw a definite retrenchment, with the cumulative returns currently back just a little above 2%.

Primary issuance has been fairly robust for most of the year. According to data compiled by Prospect News, $184.17 billion of new U.S. dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 298 tranches as of Thursday’s close – although that pace has recently slowed markedly. While for many weeks it had run solidly ahead of the new-deal pace seen a year ago, this year’s totals have now fallen marginally behind the $185.55 billion which had priced in 342 tranches by this point on the calendar.

Corporates show improvement

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an inflow of $1.093 billion for the week, breaking a losing streak which had seen outflows from those funds over the previous four consecutive weeks and in five out of the prior six weeks.

The funds had shown a $655 million outflow during the week ended July 1.

Despite the recent weakness, inflows have now been seen in 20 weeks out of the 27 since the start of the year, against seven weeks of outflows.

This week’s inflow raised the high-grade funds’ year-to-date net cash gain to $29.948 billion from $28.855 billion last week. This week’s year-to-date figure was a new peak level for the year, surpassing the old mark of $29.148 billion set during the week of June 3.

In 2014, the funds generated $86.111 billion of net inflows for the year.

Leveraged loan participation funds, which have been struggling for the most part this year and which have been generally under pressure for more than a year now, showed an $18.52 million inflow this week, versus last week’s $364.6 million outflow, which had been its fifth consecutive weekly loss.

The inflow brought the funds’ year-to-date net outflow figure down to $4.116 billion from the previous week’s $4.134 billion.

© 2015 Prospect News.
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