Junk funds see $600.8 million inflow, second gain in past three weeks

By Paul Deckelman

New York, June 4 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, made a detour from their recent mostly negative pattern this week, posting a sizable inflow, their second such gain in the past three weeks.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $600.8 million more came into those weekly-reporting-only funds than left them during the week ended Wednesday.

That was a solid comeback from the $111.1 million cash loss for the seven-day period ended May 27 that was reported last Thursday by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

The latest inflow was the second seen in the past three weeks. The funds had also shown a gain of $906 million during the week ended May 20.

Despite those two inflows, the overall pattern of the fund flows recently has been decidedly negative. The outflow recorded last week had been the fifth such downturn in the previous six weeks; there had been four consecutive outflows totaling $3.85 billion from the week ended April 22 through the week ended May 13, according to a Prospect News analysis of the figures. That losing streak had included a $2.75 billion cash hemorrhage seen in the week ended May 6 – the biggest cash plunge seen so far this year, according to the analysis.

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 grows

With 22 weeks in the books so far this year, the current week’s inflow marked the 13th gain seen so far in 2015 against nine outflows.

It raised the year-to-date net inflow total to $9.02 billion from $8.42 billion last week.

However, that year-to-date total still 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 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 inflow

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw an inflow “a little over $800 million,” a market source said.

That third consecutive inflow was about double the previous week’s cash addition of just over $400 million.

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; there was a divergence last week, with EPFR showing an inflow while AMG/Lipper recorded an outflow, and there had also been a similar divergence during the week ended April 22, which saw EPFR posting a $375 million inflow while AMG/Lipper was recording a $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 last week and back in April, EPFR accordingly has now seen 15 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 found its footing over the last few weeks. Annualized returns are currently near their highs for the year so far, although this week’s levels – the index closed Thursday with a year-to-date-return of 3.606% – were down from levels topping the psychologically significant 4% mark that had been recorded at the end of last week.

However, primary issuance continued to roll on unscathed. According to data compiled by Prospect News, $172 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 273 tranches as of Thursday’s close, running 17% ahead of the new-deal pace seen a year ago, when $146.96 billion had priced in 272 tranches by this point on the calendar.

Corporates climb, loans lose

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an inflow of $231.6 million for the week, reversing the $127.1 million outflow seen last week.

That outflow had followed two consecutive weeks of gains, including the $933 million inflow seen during the week ended May 20 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 19 weeks out of the 22 since the start of the year, against just three outflows, the other one having occurred during the week ended April 15.

This week’s inflow raised the high-grade funds’ year-to-date net cash gain to $29.15 billion from last week’s $28.92 billion.

This week’s year-to-date figure represents a new peak level for 2015 so far, versus the old high-water mark of $29.04 billion in the week ended May 20.

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

Meanwhile, leveraged-loan participation funds were back on the downside with a $93.9 million outflow in the latest week, after previously having seen three consecutive weekly inflows, including a $38.6 million cash gain in the week ended May 27.

This week’s outflow was the 16th seen so far this year against only six inflows.

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 last April. At one point, between last July and February, they recorded 31 consecutive weekly outflows.

The loan funds have seen $3.06 billion of net outflows so far this year, having widened from the $2.97 billion net loss seen last week. The latest week’s cumulative outflow figure is less than the $3.87 billion seen the week ended April 8, the 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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