Junk funds see second straight $1.2 billion outflow, third loss in row

By Paul Deckelman

New York, Aug. 13 – 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 third consecutive weekly downturn.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $1.21 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

That almost identically matched the $1.20 billion net loss that was reported last week for the seven-day period ended Aug. 5 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division, which had followed a $1.72 billion cash loss in the week ended July 29.

That outflow, in turn, 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 those July inflows, things have lately been considerably more negative as a rule. This week’s outflow, for example, was the 11th seen in the past 17 weeks, according to a Prospect News analysis of the figures.

Year-to-date outflow deepens

On a longer-term basis, with 32 weeks in the books so far this year, the current week’s outflow marked the 15th such weekly cash loss, versus 17 cash gains since the year began.

It deepened the year-to-date net outflow the funds have seen to $1.57 billion from the $351.91 million observed last week, when the cumulative fund flows figure had slid into the red for the first time since early January. The week before that, ended July 29, the funds were still in positive territory for the year with a net inflow of $849.09 million.

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

EPFR slide continues

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw an outflow that was “very similar” in size to the one reported by AMG/Lipper, a market source said.

It was the third consecutive outflow 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 an outflow “about one-fifth” the $1.20 billion cash loss seen by AMG/Lipper was probably due to the fact that the European high-yield funds that it tracks “were still attracting money” even as money was flowing out of domestic high-yield funds.

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.

In the week before that, ended July 29, EPFR had recorded a net outflow from the funds it tracks of $1.37 billion.

Before that, in the week ended July 22, EPFR had seen an inflow “about five times” AMG/Lipper’s $81.8 million cash addition, the market source said, which had followed an inflow in the week ended July 15 that was “in the same ballpark” size-wise as AMG/Lipper’s reported more than $1 billion cash improvement.

Those two inflows 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 massive $3.5 billion cash plunge during the July 1 week, the source said, the same week that AMG/Lipper had seen the funds plunge by $2.98 billion.

While the two services’ respective weekly results usually point pretty much in the same direction, that hasn’t always been the case. There have been four weeks so far this year, including the aforementioned July 8 week, in which one of the services saw an inflow and the other an outflow.

But the overall net effect of those four relatively uncommon divergences has been that like AMG/Lipper, EPFR has now also seen 17 inflows so far this year, against 15 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.

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 since June, there has been a definite retrenchment, with year-to-date returns only around the 0.5% mark.

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

According to data compiled by Prospect News, $204.67 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 335 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 very marginally lag the $205.02 billion that had priced in 395 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 a net outflow of $1.85 billion during the week ended Wednesday – the biggest weekly drop since June 2013.

It was the third consecutive outflow for the corporate bond funds. It followed on the heels of a $1.26 billion outflow in the week ended July 29 and a $740.2 million outflow during the week ended Aug. 5.

Those three outflows, in turn, had followed three straight inflows, including $889 million in the week ended July 22. The funds 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.

Despite the recent weakness, inflows have now been seen in 22 weeks out of the 32 since the start of the year, against 10 weeks of outflows. The year-to-date net inflow number stood at $26.26 billion, down from $28.06 billion, according to a Prospect News analysis of the figures.

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

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