Junk funds gain $17.7 million, marking third consecutive inflow

By Paul Deckelman

New York, Sept. 24 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, showed a third straight week of net additions by investors in the latest reporting week.

Those inflows follow two straight weeks before that of net redemptions.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $17.7 million more had come into those weekly-reporting-only funds than had left them during the week ended Wednesday.

On a day-by-day basis, a market source told Prospect News that the funds – ETFs plus the actively managed mutual funds – were tracking $575 million of inflows to Monday's close. But then two successive days of heavy outflows from ETFs whittled that amount down to the relatively small inflow reported Thursday.

Thursday’s inflow followed the $236.38 million cash addition that was reported last week for the seven-day period ended Sept. 16 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

Before that had come a cash gain of $185.8 million during the week ended Sept. 9.

The three inflows, totaling $439.88 million, in turn followed two straight weeks of outflows before that totaling $1.83 billion – a $227 million cash loss for the week ended Sept. 2 and a $1.60 billion downturn during the week ended Aug. 26.

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

However, the trend has been more negative recently, with five outflows recorded during the past nine weeks, including three straight weeks of cash losses topping $1 billion each week and totaling $4.14 billion – 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 a $1.72 billion cash loss in the week ended July 29.

YTD outflow modestly improves

While there have been a few inflows in recent weeks, things have lately been considerably more negative as a rule; in the last 23 weeks, the funds have seen 13 outflows, according to a Prospect News analysis of the figures, versus just 10 gains.

However, on a longer-term basis, with 38 weeks in the books so far this year, the current week’s inflow marked the 21st 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 $2.84 billion from the $2.86 billion cumulative deficit recorded last week and from the $3.28 billion net outflow seen the week ended Sept. 2 – the most red ink 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 were 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 back in the red

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw an outflow in the $250 million range in the latest week, a market source said, noting “redemptions from high-yield funds with global and European mandates.”

That was in contrast to a smallish inflow – under $100 million, the market source said – during the week ended Sept. 16, which had broken a string of seven consecutive weeks of outflows before that, according to a Prospect News analysis of the data, including the most recent previous outflow of somewhat under $1 billion during the week ended Sept. 9 as well as a monster outflow of $4.93 billion during the week ended Aug. 26.

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 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 18 inflows so far this year, against 20 outflows – three fewer inflows and three 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 $1.6 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 moved back up from those lows for a time, with returns modestly back into the black, but an extended losing streak has returns back in the red and near their low for the year.

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, $220.03 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 353 tranches as of Thursday’s close, running about 11.8% behind the $249.56 billion that had priced in 469 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’ slide continues

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net outflow of $3.52 billion million during the week ended Wednesday – the largest flood of net redemptions seen in the United States so far this year and the most since 2013.

It was the second consecutive outflow from those funds, which had seen a cash loss of $737.15 million last week and the eighth downturn in the last nine weeks.

That long losing streak was interrupted only by the $416 million inflow reported during the week ended Sept. 9, which had been the first such cash gain 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’ previous biggest weekly loss so far this year

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 $740.2 million downturn during the week ended Aug. 5 and a $1.26 billion outflow in the week ended July 29.

Those six outflows, in turn, followed three straight inflows, including $889 million in the week ended July 22. The funds 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 38 since the start of the year, against 15 weeks of outflows. The year-to-date net inflow number, however, declined to $17.06 billion from $20.58 billion last week, Lipper said.

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

Loan funds continue losses

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 ninth consecutive downturn this week, as $257.7 million more left those funds than came into them.

That slide followed last week’s outflow of $350.48 million.

Before that, the funds had seen cash losses of $138.4 million for the week ended Sept. 9, $573 million in the 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 $8.10 billion from $7.84 billion last week, according to Lipper.

Paul. A. Harris contributed to this report

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