Junk funds see $922 million outflow for week, sixth consecutive decline

By Paul Deckelman

New York, Jan. 8 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – posted a net outflow in the latest reporting week, market sources said Thursday. It was their sixth consecutive weekly downturn and the first of the new 2015 calendar year.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $922.2 million more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

That followed the $960 million outflow reported last week by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., covering the seven-day period ended Dec. 31.

Those two outflows had followed a $335.5 million downturn seen during the week ended Dec. 24 and a $3.08 billion cash loss during the week ended Dec. 17 – the second-largest outflow seen in 2014. That was dwarfed by only the record $7.07 billion money hemorrhage the funds had suffered during the week ended Aug. 6, the biggest outflow the company had seen since it began tracking the fund flows back in 1992.

Before those two outflows had come a deficit of $1.89 billion during the week ended Dec. 10 and an $859 million outflow recorded during the week ended Dec. 3.

During that six-week stretch, outflows have totaled $8.05 billion, according to a Prospect News analysis of the Lipper figures.

The latest week’s outflow was the seventh such retreat seen over the last eight weeks, according to the analysis, a losing pattern interrupted only by a modest $44.49 million inflow recorded during the week ended Nov. 26. Before that, the fund-tracking service had seen a $280.7 million outflow during the week ended Nov. 19.

Year starts on a down note

The outflow reported Thursday was the first fund-flows number of the new year, putting the year-to-date total so far at negative $922.2 million.

During 2014, meanwhile, inflows were seen in 31 weeks, versus 21 weeks of outflows, according to the analysis.

Despite that roughly three-to-two numerical edge for the inflows, cumulative fund flows for the year were negative, finishing the year $6.27 billion in the red.

A key factor in the negative full-year numbers – despite all of those many weeks of gains – was the four straight weeks of massive outflows recorded between the week ended July 16 and the week ended Aug. 6, the week of the record heavy outflow, as noted.

That sea of red ink more than wiped out what had been a positive year-to-date fund-flow pattern up to that point.

After that, things turned choppy, while the year-to-date total mostly remained on the downside, according to the analysis, only edging back into the black in early November before heading back into negative territory for good in December.

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 huge outflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime saw an outflow in the latest week that was described by a market source as “more than double” that reported by AMG/Lipper.

That followed a close to $650 million outflow seen the week before.

Those latest outflows followed a string of similar recent money losses, including one mammoth cash drain of over $5 billion in the week ended Dec. 17 – an 18-week high dating back to the week ended Aug. 6, when the service saw a record $11 billion outflow.

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. However, in the latest week, the source said, most of the losses were attributable to the U.S.-based funds.

During 2014, EPFR recorded inflows in 31 weeks versus 21 outflows, the same as AMG/Lipper, according to a Prospect News analysis of the figures. However, while the two services’ respective weekly results usually point pretty much in the same direction, that has not always been the case; there have been some weeks when AMG/Lipper showed outflows while EPFR saw overall inflows or vice versa.

Is the tide turning?

A junk trader, who spoke to Prospect News before the figures came out on Thursday, speculated that although the market had pushed upward on Tuesday and again on Wednesday – a condition that would normally encourage flows of cash into the funds – the reality was that “Friday and Monday were both definitely outflow days,” and he wasn’t convinced that inflows Tuesday and Wednesday would be strong enough to counter that, which ultimately proved to be the case.

However, looking ahead, another market source who particularly watches what goes on with the ETFs said that “Thursday’s activity in the ETFs is indicative of inflows.

“So [the AMG/Lipper numbers] notwithstanding, the tide may have turned on Thursday for the ETFs,” which could possibly point toward an overall inflow number next week.

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 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 were 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 turned 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, new issuance ran slightly ahead of 2013’s near-record pace for much of the latter part of the year, only to finally fall behind the year-earlier totals as the year came to a close.

Corporates come back

A market source meantime said that investment-grade corporate bond funds saw a $2.97 billion net inflow for the week – the second in the past three weeks. Those funds had shown a rare outflow in the week ended Dec. 31, losing $1.22 billion, versus the previous week’s $2.59 billion inflow. The corporate funds had also suffered a $79.8 million outflow during the week ended Dec.17 – a relatively rare pattern of recent weakness, contrasting with the overwhelmingly positive pattern seen over most of the year.

The year 2014 ended with a cumulative corporate fund inflows figure of $86.11 billion, down slightly from their peak level for the year of $87.33 billion, recorded the week before, according to a Prospect News analysis of the data.

However, there was no such upturn this week for leveraged loan funds.

A market source said that those funds saw outflows of $374.4 million in the latest week, following the prior week’s $1.10 billion downturn. It was the 25th consecutive weekly outflow from those funds, which racked up a grand total of $17.26 billion of cumulative red ink for the year.

Those funds have been struggling mightily since last April, when an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end.

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