Junk funds gain $186 million, first inflow after two straight outflows

By Paul Deckelman

New York, Sept. 10 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – showed net additions by investors in the latest reporting week after two straight weeks before that of net redemptions.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $185.8 million more had come into those weekly reporting-only funds than had left them during the week ended Wednesday.

That inflow came on the heels of the two consecutive outflows – the $227 million cash loss that was reported last week for the seven-day period ended Sept. 2 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division, and before that, a $1.60 billion downturn during the week ended Aug. 26.

This week’s inflow was the second in the last four weeks, including the $111.1 million inflow seen during the week ended Aug. 19.

However, the trend has been more negative recently, with last week’s outflow having been the fifth in the previous six weeks – a losing streak interrupted only by the inflow in the Aug. 19 week and including three straight weeks of cash losses topping $1 billion each week and totaling some $4.14 billion.

These included a $1.21 billion net decline during the week ended Aug. 12, on top of an almost identically sized $1.20 billion outflow during the week ended Aug. 5, and before that, a $1.72 billion cash loss in the week ended July 29.

That earlier outflow 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.

Year-to-date outflow improves

While there have been a few inflows in recent weeks, things have lately been considerably more negative as a rule; in the last 21 weeks, the funds have seen 13 outflows, according to a Prospect News analysis of the figures, versus just eight gains.

However, on a longer-term basis, with 36 weeks in the books so far this year, the current week’s inflow marked the 19th such weekly cash gain, versus 17 weekly cash losses since the year began.

It reduced the year-to-date net outflow the funds have seen to some $3.10 billion from the $3.28 billion recorded last week – the biggest cumulative deficit so far this year.

Going back to the beginning of 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, but then stayed in positive territory for most of the months after that, reaching a peak cumulative inflow level of $11.48 billion during the week ended April 15.

However, things started to go downhill after that, with net inflows steadily deteriorating from the peak until they were last seen during the week ended July 29, when the funds were still in the black to the tune of $849.09 million. Cumulative fund flows tumbled back into negative territory for the first time since January during the week ended Aug. 5, showing a $351.91 million net outflow for the year at that point, and the red ink has deepened 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 stays negative

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw “more outflows” in the latest week, a market source said, although he pegged the size of the loss as under $1 billion.

It was the seventh consecutive outflow seen by the EPFR-tracked funds, according to a Prospect News analysis of the data, also including downturns of $937.6 million last week, $4.93 billion in the week ended Aug. 26 and a little over $750 million in the week ended Aug. 19.

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 have been a number of weeks so far this year, including the latest week, in which one of the services saw an inflow and the other an outflow, or vice versa.

The overall net effect has been that EPFR has now seen 17 inflows so far this year, against 19 outflows – two fewer inflows and two more outflows than its rival, according to the Prospect News analysis of the two companies’ figures.

The two services meanwhile 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 starting in June, the junk market gave all of that back, and then some. By late August, returns had dipped into negative territory for the first time since mid-January and had racked up their largest cumulative losses since 2011.

The market has since recently moved back up from those lows, with returns modestly back into the black, for now.

Primary issuance, driven by ample liquidity, was fairly robust for most of the year, although it slowed markedly in recent weeks, in line with sagging overall market performance.

According to data compiled by Prospect News, some $206.96 billion of new U.S. dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 339 tranches as of Thursday’s close, running about 7.4% behind the $223.61 billion that had priced in 425 tranches by this point on the calendar in 2014.

This year’s issuance pace recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago.

Corporates attract investment

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net inflow of $416 million during the week ended Wednesday – their first such inflow after six consecutive weeks of outflows before that.

The outflows included the $2.27 billion cash hemorrhage seen during the week ended Sept. 2 – the funds’ biggest weekly loss so far this year and, in fact, the biggest such drop recorded since 2013.

The corporate funds had also seen outflows of $1.99 billion during the week ended Aug. 26, $1.09 billion in the week ended Aug. 19, a $1.85 billion outflow for the week ended Aug. 12, a $1.26 billion outflow in the week ended July 29 and a $740.2 million downturn during the week ended Aug. 5.

Those six outflows, in turn, 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 still now been seen in 23 weeks out of the 36 since the start of the year, against 13 weeks of outflows. The year-to-date net inflow number improved to $21.32 billion from $20.91 billion, according to a Prospect News analysis of the figures.

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, saw their seventh consecutive downturn this week, as some $138.4 million more left those funds than came into them.

That slide followed outflows of $573 million last week ended Sept. 2, $796 million in the week ended Aug. 26 – the biggest such cash drain seen so far this year – $754 million in the week ended Aug. 19, $745 million in the week ended Aug. 12, $594 million in the week ended Aug. 5 and $12.9 million in the week ended July 29.

The current losing streak follows a relatively rare show of strength for the mostly underperforming loan funds – a $208.1 million inflow in the week ended July 22, the most recent weekly inflow reported, and before that, inflows of $33.79 million in the week ended July 15 and $18.2 million in the week ended July 8; that earlier inflow broke a five-week skid that included a $364.6 million outflow in the week ended July 1.

The latest outflow brought the funds’ year-to-date net outflow figure up to $7.49 billion, according to Lipper.

© 2015 Prospect News.
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