Junk funds show $82 million inflow, third straight gain after biggest loss so far this year

By Paul Deckelman

New York, July 23 – High-yield mutual funds and exchange-traded funds, which are considered a reliable barometer of overall junk market liquidity trends, continued to show improvement this week from their biggest cash loss for the year so far, which was seen three weeks ago.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $81.8 million more had come into those weekly-reporting-only funds than had left them during the week ended Wednesday.

Some $93 million more had come into traditional high-yield mutual funds than had left them during the most recent week, partly offset by an $11 million net cash loss from the ETFs.

This week’s overall inflow was the third consecutive weekly improvement for the funds and came on top of the robust $1.23 billion inflow reported last week for the seven-day period ended July 15 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

That big inflow in turn had followed a modest $45.08 million cash addition recorded during the week ended July 8.

The three inflows, totaling $1.36 billion, meanwhile follow the yawning $2.98 billion outflow reported the week before that, 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 fourth upturn seen over the past five weeks, including the $621 million cash addition during the week ended June 24.

But even counting the latest week’s inflow, that quartet of cash gains has been the exception to the generally negative recent rule, with outflows still having been posted in eight weeks out of the last 14, according to a Prospect News analysis of the figures.

Year’s net inflow improves

A little over the halfway mark of 2015, with 29 weeks in the books so far this year, the current week’s inflow marked the 17th such weekly cash gain, versus 12 cash losses since the year began.

It brought the year-to-date net inflow total up to $2.57 billion from $2.49 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, Cambridge. Mass.-based EPFR Global, meanwhile saw an inflow that was “about five times” that reported by AMG/Lipper, a market source said.

It was the second consecutive inflow seen by the EPFR-tracked funds, according to a Prospect News analysis of the data.

Last week, a market source said that EPFR’s report of a sizable inflow in the week ended July 15 had been “in the same ballpark” as AMG/Lipper’s reported more than $1 billion cash improvement.

Last week’s inflow had broken a five-week losing streak that had included an outflow of about $1 billion during the week ended July 8 – in contrast to the small inflow that AMG/Lipper had posted for the week, as noted – 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 the divergence seen during the July 8 week, 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 17 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 July have seen a definite retrenchment, with the cumulative returns currently around 1.5%.

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, $191.46 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 311 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 1.8% behind the $194.99 billion that had priced in 365 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 $889 million during the week ended Wednesday.

It was the corporate funds’ third straight upturn, their having also gained $267.50 million during the week ended July 15 on top of a $1.09 billion gain for the week ended July 8. That earlier inflow had broken 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 22 weeks out of the 29 since the start of the year against seven weeks of outflows. The year-to-date net inflow number stood at $30.11 billion versus the previous week’s $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, continued their recent show of strength with a $208.1 billion inflow for the week.

It was the loan funds’ third consecutive gain and followed last week’s $33.79 million inflow and the $18.52 million improvement seen during the week ended July 8.

That earlier cash gain, in turn, had broken a five-week losing streak, including the $364.6 million outflow seen the week ended July 1, the most recent outflow.

The latest inflow brought the funds’ year-to-date net outflow figure down to $3.87 billion from the previous week’s $4.08 billion deficit.

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