Junk funds see $111.1 million outflow, fifth downturn in six weeks

By Paul Deckelman

New York, May 28 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, resumed their recent negative pattern this week after having posted a sizable inflow last week, market sources said Thursday.

It was the fifth such outflow in the last six weeks.

The downturn slightly dented the funds’ still-robust year-to-date net inflow position, although that remains below its high point for the year so far.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $111.1 million more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

That was a far cry from the $906 million cash gain for the seven-day period ended May 20 that was reported last Thursday by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

Last week’s inflow had consisted of a net of $461 million flowing into traditional managed high-yield mutual funds, with another $445 million seen having gone into the ETFs. There was no such breakdown heard in the market this week.

Last week’s inflow, had, in turn, followed four consecutive weeks of outflows totaling $3.85 billion, according to a Prospect News analysis of the figures.

These included a $162.2 million outflow during the week ended April 22, which was followed by an $859.1 million cash loss during the week ended April 29. Then came a $2.75 billion cash hemorrhage seen in the week ended May 6 – the biggest cash decline seen so far this year, surpassing the largest outflow previously seen so far this year, $1.96 billion during the week ended March 11.

The losing streak was topped off by an $89 million cash loss in the week ended May 13.

Those four weeks of losses, in turn, followed four consecutive weeks of inflows through the week ended April 15 that totaled $3.31 billion, according to the analysis.

Year’s net inflow softens

With 21 weeks in the books so far this year, the current week’s outflow marked the ninth loss seen so far in 2015 against a total of 12 inflows.

It lowered the year-to-date net inflow total to $8.42 billion from $8.53 billion last week.

That year-to-date total also remained well below the $11.48 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 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 inflow

While AMG/Lipper reported a net outflow for the latest week, another fund-tracking service, the Cambridge. Mass.-based EPFR Global, saw an inflow “a bit north of $400 million,” a market source said.

That second straight inflow followed a $250 million inflow the week before.

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 the divergence this week, the week ended April 22 saw EPFR posting a $375 million inflow while AMG/Lipper was recording its aforementioned $162.2 million outflow.

While the two services’ results this year had been in tandem prior to April 22, after those two relatively uncommon divergences this week and back in April, EPFR accordingly has now seen 14 inflows so far this year against seven outflows, according to a Prospect News analysis of those figures – two additional inflows and two fewer outflows than AMG/Lipper.

The two services did both see 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, although it seems to have lately found its footing, with annualized returns at their highs for the year so far, having topped the 4% mark for the first time this year on Wednesday.

According to data compiled by Prospect News, primary issuance of $160.64 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 254 tranches as of Thursday’s close, running 12% ahead of the new-deal pace seen a year ago, when $143.40 billion had priced in 263 tranches by this point on the calendar.

Corporates lose, loans gain

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an outflow of $127.1 million for the week, the first outflow after two consecutive weeks of gains, including the $933 million inflow seen last week and $958 million in the week ended May 13.

Those two weeks of inflows, in turn, followed a $531.1 million outflow during the week ended May 6.

Inflows have now been seen in 18 weeks out of the 21 since the start of the year against just three outflows, the other one having occurred during the week ended April 15.

This week’s outflow lowered the high-grade funds’ year-to-date net cash gain to an $28.92 billion from the previous week’s $29.04 billion, its peak level for the year so far.

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

Meanwhile, leveraged-loan participation funds recorded their third consecutive rise – a $38.6 million inflow. That followed cash gains of $231 million and $173 million.

This week’s inflow was only the sixth seen so far this year against 15 outflows.

Outside of those relatively uncommon inflows, the loan funds have been mostly struggling for the past year after an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end in April 2014. At one point between last July and February, they recorded 31 consecutive weekly outflows.

The loan funds have seen $2.97 billion of net outflows so far this year, improved from $3.01 billion the week before and from $3.87 billion seen the week ended April 8, their biggest cumulative loss for the year so far.

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

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