Junk funds gain $1.476 billion in week, second straight inflow

By Paul Deckelman

New York, Oct. 15 – High-yield mutual funds and exchange-traded funds showed major net additions by investors in the latest reporting week, the second consecutive week in which inflows have been seen.

The two weeks of positive fund flows represent a rebound from the heavy net redemptions reported two weeks ago. The flow data is considered a reliable barometer of overall junk market liquidity trends.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $1.435 billion million more came into those weekly-reporting-only funds than left them during the week ended Wednesday – almost double the $735 million cash gain that was reported last week for the seven-day period ended Oct. 7 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

That earlier inflow followed the $2.152 billion cash loss that was recorded during the week ended Sept. 30.

This week’s inflow was the fifth in the last six weeks, according to a Prospect News analysis of the data. That recent show of strength includes three straight weeks of cash gains totaling $439.88 million – $17.7 million during the week ended Sept. 23, $236.38 million during the week ended Sept. 16 and $185.8 million during the week ended Sept. 9.

Those three inflows, in turn, had followed two straight weeks of outflows before that totaling $1.829 billion – a $227 million cash loss for the week ended Sept. 2 and a $1.602 billion downturn during the week ended Aug. 26.

Over the last 12 weeks, inflows and outflows have been evenly split, with six of each, the analysis indicated.

In the intermediate term, in the last 26 weeks, the funds have seen 14 outflows against 12 gains, the analysis indicated.

Reduced year-to-date outflow

On a longer-term basis, however, with 41 weeks in the books so far this year, there have been 23 inflows seen against 18 outflows.

But on a cumulative basis, the junk funds remain deep in the red for the year so far – although the latest inflow narrowed the funds’ year-to-date loss to $2.784 billion from last week’s $4.26 billion and from the $4.995 billion cumulative deficit seen in the week ended Sept. 30, which was the biggest year-to-date loss seen so far this year, according to the analysis.

Going back to the beginning of the year, 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 data analysis, but then stayed in positive territory for most of the several months after that, reaching a peak cumulative inflow level of $11.476 billion during the week ended April 15.

However, things started to go downhill after that, with net inflows steadily deteriorating from the peak until they were last seen during the week ended July 29, when the funds were still in the black to the tune of $849.091 million. Cumulative fund flows tumbled back into negative territory for the first time since January during the week ended Aug. 5, showing a $351.909 million net outflow for the year at that point, and the red ink has deepened since then, the analysis showed.

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 numbers turn positive

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw a $2.5 billion inflow, a market source said – the first such cash gain following three straight weeks of outflows.

The most recent of these was a $2.5 billion outflow seen last week.

Before that, during the week ended Sept. 30, the company had posted an outflow “about one-third bigger” than that reported by AMG/Lipper, the source said, while in the week ended Sept. 23, the source put the cash loss in the $250 million range, noting “redemptions from high-yield funds with global and European mandates.”

During the week ended Sept. 16, the source had seen an inflow of under $100 million – which had broken a string of seven consecutive weeks of outflows before that, according to a Prospect News analysis of the data, including a monster outflow of $4.93 billion during the week ended Aug. 26.

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.

The source said that this week, “around 50%” of the total inflow had been attributable to dedicated U.S. high yield funds.

Last week, the source said, EPFR’s U.S.-domiciled funds had seen a net outflow of a little over $520 million – with the rest of the $2.5 billion of red ink racked up by the funds with European and global mandates.

While the two services’ respective weekly results usually point pretty much in the same direction, that hasn’t always been the case; there have been a number of weeks so far this year, including last week, in which one of the services saw an inflow and the other an outflow, or vice versa.

The overall net effect has been that EPFR has now seen 19 inflows so far this year, against 22 outflows – four fewer inflows and four more outflows than its rival, according to the Prospect News analysis of the two companies’ figures.

The two services meanwhile both saw inflows in 31 weeks versus 21 outflows last year, according to the analysis, although in the course of reaching those totals – as has been the case this year - there were some relatively rare weeks when AMG/Lipper showed outflows while EPFR saw overall inflows, or vice versa.

Flows 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 $1.6 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 the junk primary market over the past several years, including last year, when 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.

This year’s primary issuance, driven by ample liquidity, has been fairly robust for most of the year, although it slowed markedly in recent weeks from its earlier frenetic pace amid an upturn in financial market volatility.

According to data compiled by Prospect News, some $226.45 billion of new U.S. dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 359 tranches as of Thursday’s close, running about 14.4% behind the $264.46 billion that had priced in 491 tranches by this point on the calendar in 2014.

This year’s issuance pace recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago.

Secondary market performance has also been helped by the flows of cash into the funds, and into the broader market as well, although both last year and this year, performance turned erratic in the latter part of the year.

Secondary market performance, as measured by widely followed indexes, began to weaken 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.

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 starting in June, the junk market gave all of that back, and then some. By late August, returns had dipped into negative territory for the first time since mid-January, and apart from a small and short-lived subsequent blip back upward, they have pretty much remained in the red since then, although they have lately improved from their lows for the year established earlier this month.

Corporates funds break slump

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net inflow of $1.108 billion during the week ended Wednesday.

That broke a string of four consecutive outflows from the funds, including the $941 million outflow seen last week.

Before that had come a $3.617 billion cash hemorrhage reported during the week ended Sept. 30 – the largest such outflow on record, according to Lipper. It had topped the previous largest flood of net redemptions – the $3.523 billion downturn seen the week before that, ended Sept. 23.

The losing streak also saw a cash loss of $737.154 million in the week ended Sept. 16.

The latest week’s inflow was only the second in the last 12 weeks, against 10 downturns – a skid interrupted only by the $416 million inflow reported during the week ended Sept. 9, which had been the first such cash gain after six consecutive weeks of outflows before that, according to a Prospect News analysis of the data.

Despite that recent weakness, inflows have still now been seen in 24 weeks out of the 41 since the start of the year, against 17 weeks of outflows.

The year-to-date net inflow number firmed this week to $13.608 billion from $12.5billion last week, Lipper said.

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

© 2015 Prospect News.
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