Junk funds show $1.2 billion outflow, swing into red for the year

By Paul Deckelman

New York, Aug. 6 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, stayed on the downside this week, their second consecutive weekly downturn.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $1.20 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

That outflow followed the $1.72 billion net loss that was reported last week for the seven-day period ended July 29 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division, which had snapped a three-week winning streak before that totaling $1.36 billion – a modest $45.08 million cash addition recorded during the week ended July 8 followed by the robust $1.23 billion inflow in the week ended July 15 and capped off by the more sedate $81.8 million net inflow for the week ended July 22.

Despite that recent cluster of inflows, things have lately been considerably more negative as a rule. This week’s outflow, for example, was the 10th seen in the past 16 weeks, according to a Prospect News analysis of the figures.

Year’s total falls into red

On a longer-term basis, with 31 weeks in the books so far this year, the current week’s outflow marked the 14th such weekly cash loss versus 17 cash gains since the year began.

It swung the year-to-date net fund flows total back into the red for the first time since early in January.

According to the data, the funds have now seen a year-to-date net outflow of $351.91 million versus the $849.09 million net inflow observed last week.

The year-to-date total had been steadily deteriorating from $11.48 billion inflow seen during the week ended April 15, the peak cumulative inflow total for the year.

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, and then stayed in positive territory up until this week.

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.

Flows 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 saw a definite retrenchment, with the cumulative returns falling as low as around 1% towards the end of the latter month. Weakness has also been seen in the beginning of August, with returns under the 1.5% mark.

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, $199.57 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 323 tranches as of Thursday’s close – although that pace 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 1.6% behind the $202.82 billion that had priced in 386 tranches by this point on the calendar in 2014.

Corporates on the slide

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted their second consecutive weekly outflow, dropping by $740.2 million during the week ended Wednesday.

That followed the $1.26 billion cash loss seen during the week ended July 29, which broke a string of three straight weekly inflows in the weeks ended July 8, July 15 and July 22

Inflows have now been seen in 22 weeks out of the 31 since the start of the year against nine weeks of outflows. The year-to-date net inflow number stood at $28.10 billion versus the previous week’s $28.84 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, also saw their second consecutive weekly downturn after several solid weeks on the upside before that.

The latest week’s outflow was $594 million, coming on the heels of the prior week’s $12.9 million outflow, which had been the first outflow after three straight weeks of gains.

However, those gains had been the exception to the general rule, with the cumulative loan funds total for the year deep in the red.

The latest inflow brought the funds’ year-to-date net outflow figure up to $4.48 billion from the previous week’s $3.89 billion deficit.

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