Junk funds jump by $1.23 billion, second straight gain after biggest loss so far this year

By Paul Deckelman

New York, July 16 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, were solidly higher in the latest week, continuing to rebound from their biggest cash loss for the year so far, which was seen two weeks ago.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $1.23 billion more had come into those weekly-reporting-only funds than had left them during the week ended Wednesday.

It was the second consecutive weekly improvement for the funds, coming on top of the modest $45.08 million inflow reported for the seven-day period ended July 8 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

The two inflows, totaling $1.28 billion, follow the $2.98 billion outflow reported the week before that, which ended July 1.

That massive outflow was the biggest such downturn seen so far this year, eclipsing the $2.89 billion cash loss recorded during the week ended June 17, and was also the largest seen since the week ended Dec. 17, 2014, when $3.08 billion more left the funds than came into them.

This week’s inflow, meanwhile, was the third upturn seen over the past four weeks, including the $621 million cash addition during the week ended June 24.

But even counting the latest week’s big inflow, the trio of cash gains has been the exception to the generally negative recent rule, with outflows still having been posted in three weeks out of the last six and, longer-term, in eight weeks out of the last 13, according to a Prospect News analysis of the figures.

Year’s net inflow improves

A little over the halfway mark of 2015, with 28 weeks in the books so far this year, the current week’s inflow marked the 16th such weekly cash gain, versus 12 cash losses since the year began.

It roughly doubled the year-to-date net inflow total to $2.49 billion from $1.26 billion last week.

However, the year-to-date total remains 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 turns positive

Another fund-tracking service, the Cambridge. Mass.-based EPFR Global, meanwhile saw an inflow “in the same ballpark” as that reported by AMG/Lipper, a market source said.

That broke a five-week losing streak for the EPFR-tracked funds, according to a Prospect News analysis of the data.

That skid included an outflow of about $1 billion last week – in contrast to the small inflow that AMG/Lipper had posted for the week – and a $3.5 billion cash plunge during the July 1 week, the source said.

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 last week’s divergence, there had also been a divergence during the week ended June 24, when EPFR saw an outflow of less than $70 million, versus the aforementioned $621 million cash gain seen by AMG/Lipper.

Earlier in the year, there were two weeks during which EPFR had seen inflows and AMG/Lipper had reported outflows: during the week ended May 27, with EPFR showing an inflow of a little more than $400 million while AMG/Lipper recorded a $111.1 million outflow, and during the week ended April 22, which saw EPFR posting a $375 million inflow while AMG/Lipper was recording a $162.2 million outflow. The net effect of those four relatively uncommon divergences has been that the two services – whose results had been in tandem from the start of the year until the week ended April 22 – are now back in harmony, with EPFR having also now seen 16 inflows so far this year, against 12 outflows, according to the Prospect News analysis of the two companies’ figures.

The two services also both saw inflows in 31 weeks versus 21 outflows last year, according to the analysis, 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 and early July saw a definite retrenchment, with the cumulative returns currently between 2% and 3%.

Primary issuance, driven by ample liquidity, has been fairly robust for most of the year, although it has recently slowed.

According to data compiled by Prospect News, $187.34 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 304 tranches as of Thursday’s close – although that pace has recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago. This year’s totals now lag about 2% behind the $191.40 billion that had priced in 358 tranches by this point on the calendar in 2014.

Corporates show improvement

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an inflow of $267.50 million during the week ended Wednesday.

It was the corporate funds’ second straight upturn, their having also gained $1.09 billion for the week ended July 8, which broke a losing streak that had seen outflows from those funds over the previous four consecutive weeks and in five out of the prior six weeks.

The funds had shown a $655 million outflow during the week ended July 1, their most recent downturn.

Despite the recent weakness, inflows have now been seen in 21 weeks out of the 28 since the start of the year, against seven weeks of outflows. The year-to-date net inflow number stood at $29.22 billion, according to Lipper.

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 $33.786 million inflow for the week.

It was their second consecutive gain and followed last week’s $18.52 million inflow, which had broken a five-week losing streak, including the $364.6 million outflow seen the week ended July 1.

The latest inflow brought the funds’ year-to-date net outflow figure down to $4.08 billion from the previous week’s $4.12 billion.

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