Junk funds see $2.77 billion inflow, biggest since September 2013

By Paul Deckelman

New York, Jan. 29 – Recently cash-strapped high-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – are flush with the long green, at least for the moment, as they posted a giant-sized net inflow for the latest reporting week, market sources said Thursday.

That big gain offset at least some of the weakness that the closely watched market measure has recently shown.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $2.77 billion more came into those funds than left them during the week ended Wednesday.

That was in sharp contrast to the $241.3 million outflow reported last Thursday by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp, for the seven-day period ended Jan. 21.

This week’s inflow was not only easily the biggest seen so far this year – there has been only one other net cash injection in 2015, $879.5 million during the week ended Jan. 14 – but also the fourth-largest weekly cash surge seen since the company began tracking the funds, according to a Prospect News analysis of the data. It was the largest inflow seen since the net $3.1 billion that came into the funds in the week ended Sept. 25, 2013, the third-biggest all-time inflow. This week’s cash cascade surpassed the net $2.44 billion that had come into the funds during the week ended Nov. 15, 2014 – last year’s biggest inflow, according to the data.

The huge inflow at least partially offsets the pattern of weakness seen in the fund flows since early December, coinciding with the great volatility the high-yield market has shown in the wake of sharply sliding oil prices and their negative impact on junk-rated energy companies. Last week’s outflow had been the seventh in the past eight weeks, a losing streak interrupted only by the inflow in the Jan. 14 week. Before that had come six consecutive outflows totaling $8.05 billion, according to the analysis; counting the previous inflow and last week’s outflow, the funds had lost a net $7.41 billion during the eight-week stretch, according to the analysis.

Yearly total turns positive

For the first time since the start of the new year, cumulative fund flows have gotten back in the black after three consecutive weeks of red ink before that.

With the two inflows so far this year, matched against two outflows – last week’s cash loss plus a $922 million outflow recorded in the year’s first week, ended Jan. 7 – the year-to-date net fund-flows total showed a $2.48 billion inflow for 2015 so far, versus the previous week’s $284 million cumulative net outflow figure, according to Lipper.

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

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 cash surge

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime saw what a market source called “the biggest inflow since the third week in October in 2013,” in contrast to the previous week, when the service had seen a “similar” outflow number to AMG/Lipper’s. That, in turn, had followed “a small inflow” the week before, which had snapped a six-week losing streak.

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 two services’ respective weekly results usually point pretty much in the same direction, with EPFR, like AMG/Lipper, having now seen two inflows versus two outflows so far this year and having also seen inflows in 31 weeks versus 21 outflows last year, according to a Prospect News analysis of those figures, the same as AMG/Lipper.

However, that has not always strictly been the case – in 2014, as in years before that, there were some rare weeks when AMG/Lipper showed outflows while EPFR saw overall inflows, or vice versa.

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 was 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, 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 behind the year-earlier totals as the year came to a close.

So far this year, with inconsistent fund flows before this week, the secondary market has struggled, producing only modestly positive results, while primary issuance of $14.46 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers, in 26 tranches as of Thursday’s close, lags 32% behind the red-hot new-deal pace seen a year ago, when $21.31 billion had priced in 37 tranches by this point on the calendar.

Corporates continue to climb

Looking at the fund flows for other asset classes, investment-grade corporate bond funds saw a $2.87 billion inflow for the week, on top of the previous week’s $1.14 billion cash addition. It was the funds’ fourth straight weekly gain and their fifth in the last six weeks.

That brought their year-to-date net inflow figure up to $8.47 billion from $5.60 billion last week, according to the Lipper figures.

In 2014, the funds generated $86.11 billion of net inflows for the year.

Leveraged-loan participation funds, on the other hand, saw outflows of $443.1 million, on the heels of last week’s $738.1 million retreat. It was the 28th consecutive weekly outflow from those funds, which 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.

With four 2015 reporting weeks in the books, the loan funds have seen $2.15 billion of net outflows so far, up from the prior week’s $1.71 billion total.

In 2014, the funds racked up cumulative red ink for the year of $17.26 billion.

© 2015 Prospect News.
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