Junk funds lose $2.15 billion in week, breaking string of three inflows

By Paul Deckelman

New York, Oct. 1 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, showed major net redemptions by investors in the latest reporting week, breaking a string of three consecutive weeks that had seen net additions to the funds.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $2.15 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

Thursday’s big outflow followed the $17.7 million cash addition that was reported last week for the seven-day period ended Sept. 23 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

Before that had come cash gains of $236.38 million during the week ended Sept. 16 and $185.8 million during the week ended Sept. 9.

Those three inflows, totaling $439.88 million, in turn had 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.

Despite the three most recent inflows and another cash injection of $111.1 million seen during the week ended Aug. 19, the trend lately has been more negative, with outflows now having been seen in six weeks out of the last 10, according to a Prospect News analysis of the figures, 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, before that, a $1.72 billion cash loss in the week ended July 29.

In the intermediate term, in the last 24 weeks, the funds have seen 14 outflows against just 10 gains.

Year-to-date outflow swells

On a longer-term basis, with 39 weeks in the books so far this year, there have been 21 inflows seen against 18 outflows.

However, on a cumulative basis, the junk funds are deep in the red for the year so far.

The latest outflow deepened the year-to-date loss to $5.00 billion from last week’s $2.84 billion cumulative deficit figure. And the loss on the year also widened from the $3.28 billion net outflow seen the week ended Sept. 2, which previously had been the most red ink seen 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 only 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 reports outflow

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw an outflow “about one-third bigger” than that reported by AMG/Lipper, a market source said.

It was the second consecutive outflow the company has reported; in the week ended Sept. 23, the source put the cash loss in the $250 million range, noting “redemptions from high-yield funds with global and European mandates.”

That was in contrast to a smallish inflow – under $100 million, the 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 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 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 last 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 21 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. While the market moved back up from those lows for a time, with returns modestly and temporarily back into the black, an extended losing streak now has returns back in the red, hitting their lows for the year.

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

According to data compiled by Prospect News, $230.85 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 360 tranches as of Thursday’s close, running about 8% behind the $251.02 billion that had priced in 473 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 $3.62 billion during the week ended Wednesday – the largest such outflow on record, according to Lipper.

That follows the previous largest flood of net redemptions, the $3.52 billion downturn seen in the week ended Sept. 23.

It was the third consecutive outflow from those funds, which also saw a cash loss of $737.15 million in the week ended Sept. 16, and the ninth downturn in the last 10 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.

Despite that recent weakness, inflows have still now been seen in 23 weeks out of the 39 since the start of the year, against 16 weeks of outflows. The year-to-date net inflow number, however, declined to $13.44 billion from $17.06 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 have been generally under pressure for more than a year now, saw their 10th consecutive downturn this week. Some $786.3 million more left those funds than came into them.

That slide followed last week’s outflow of $257.7 million.

The long losing streak dating back to the week ended July 29 includes the $796 million outflow posted during the week ended Aug. 26, the biggest such cash drain seen so far this year.

The most recent inflow those funds have seen was the $208.1 million upturn in the week ended July 22.

The latest outflow brought the funds’ year-to-date net outflow figure up to $8.88 billion from $8.10 billion last week, according to Lipper.

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