Junk funds see $2.89 billion outflow, biggest outflow since December

By Paul Deckelman

New York, June 18 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, posted their biggest outflow of the year so far this week.

It was also their second consecutive huge downturn, their third such loss in the past four weeks and their seventh setback in the past nine weeks, according to a Prospect News analysis of the figures.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $2.89 billion more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

It was not only the biggest outflow seen so far this year, eclipsing the $2.75 billion cash loss seen in the week ended May 6, the previous peak outflow level for the year, but it was also the biggest outflow seen since the week ended Dec. 17, 2014, when $3.08 billion more left the funds than came into them.

This week’s outflow represented a deterioration from the already negative pattern seen last week, when a $2.56 billion cash loss was reported for the seven-day period ended June 10 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

The two giant-sized outflows were a resounding reversal from the most recent previous inflow of $600.8 million for the week ended June 3.

The big downturn came as no real surprise to analysts, who on a day-by-day basis noted mostly outflows, some of them quite large, from dedicated high-yield mutual funds and ETFs over the past week.

Year’s net inflow shrivels

With 24 weeks in the books so far this year, the current week’s outflow marked the 11th loss seen so far in 2015 against 13 inflows.

It lowered the year-to-date net inflow total to $3.57 billion from $6.46 billion last week.

Those year-to-date totals remain 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 also sees outflow

Another fund-tracking service, the Cambridge. Mass.-based EPFR Global, meanwhile saw an outflow of a “a little over $4 billion,” a market source said.

It was the second consecutive outflow seen by the service.

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 nine 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. 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 June has seen something of a retrenchment, with the cumulative returns currently back around the 3% region.

However, primary issuance remains pretty robust. According to data compiled by Prospect News, $176.73 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 288 tranches as of Thursday’s close, running 8.4% ahead of the new-deal pace seen a year ago, when $162.99 billion had priced in 304 tranches by this point on the calendar.

Corporates also lower

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an outflow of $161.2 million for the week. It was the second straight downturn for the funds, which had retreated by $110 million last week.

It was also the third outflow in the past four weeks for the high-grade funds.

Inflows have now been seen in 19 weeks out of the 24 since the start of the year against just five outflows.

This week’s outflow lowered the high-grade funds’ year-to-date net cash gain to $28.88 billion from last week’s $29.04 billion and from the peak level for 2015 so far, $29.15 billion during the week ended June 3.

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

Leveraged loan participation funds, which have been struggling for the most part this year and which have been generally under pressure for more than a year now, showed a $310.8 million outflow this week, bringing their year-to-date net outflow to $3.60 billion.

© 2015 Prospect News.
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