Junk funds gain $2.048 billion in week, fifth straight inflow

By Paul Deckelman

New York, Nov. 5 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – showed major net additions by investors in the latest reporting week – the fifth consecutive week in which inflows have been seen, bouncing back from the heavy net redemptions reported five weeks ago.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $2.05 billion more came into those weekly reporting-only funds than left them during the week ended Wednesday.

That followed the similarly sized $2.04 billion cash injection gain that was reported last week for the seven-day period ended Oct. 28 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

During the week ended Oct. 21 inflows totaled $3.34 billion – the biggest net gain seen so far this year, topping the $2.94 billion recorded during the week ended Feb. 11, according to a Prospect News analysis of the data. In fact, the Oct. 21 week’s inflow was the second-biggest on record, the analysis indicated, exceeded only by the $4.25 billion inflow seen during almost four years earlier, during the week ended Oct. 26, 2011.

Before that giant-sized inflow had come cash injections of $1.48 billion during the week ended Oct. 14 and $735 million during the week ended Oct. 7.

Those five inflows, totaling some $9.64 billion, have followed the only net outflow seen recently – a $2.15 billion cash loss that was recorded during the week ended Sept. 30.

This week’s inflow was the eighth in the last nine weeks, according to the Prospect News analysis; besides the five most recent inflows, that show of strength also includes three straight weeks of cash gains totaling $439.88 million before the most recent loss – $17.7 million during the week ended Sept. 23, $236.38 million during the week ended Sept. 16 and $185.8 million during the week ended Sept. 9.

Over the last 10 weeks, dating back to the week ended Sept. 2, there have been eight inflows and two outflows; besides the aforementioned fund flows, that number also includes a $227 million cash loss for the week ended Sept. 2.

In the intermediate term, over the last six months, or 26 weeks, dating back to the week ended May 13, the funds have been more evenly divided, with 15 inflows and 11 outflows during that time, the analysis indicated.

YTD net inflow grows

On a longer-term basis, however, with 44 weeks in the books so far this year, inflows have predominated; there have now been 26 inflows seen against 18 outflows.

This week’s cash addition raised the year-to-date net inflow total to $4.64 billion from $2.59 billion last week, Lipper said.

The huge inflow seen during the Oct. 21 week had swung the funds’ cumulative total for the year so far back to the plus side from the $2.78 billion net 2015 outflow seen during the week ended Oct. 14, although that year-to-date deficit had narrowed from its worst level of the year, according to the analysis – the $5 billion cumulative outflow which had been seen in the week ended Sept. 30.

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 data analysis, but then stayed in positive territory for most of the several months after that, reaching a peak 2015 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 year-to-date total stayed in the red after that, until the middle of last month.

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 sees big gain

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw an inflow of more than $3.5 billion in the latest week, a market source said.

That followed inflows of nearly $4 billion last week and during the week ended Oct. 21 – the biggest such cash injections EPFR had recorded since the week ended Feb. 11, when $4.16 billion more came into the funds that it tracks then left them, the source indicated.

This week’s inflow was the fourth straight cash gain, including the roughly $2.5 billion net addition during the week ended Oct. 14, the source said – which had been the first such inflow seen by EPFR after three straight weeks of outflows before that.

The most recent of those was a $2.5 billion outflow seen in the week ended Oct. 7.

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, most recently in the Oct. 7 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 22 inflows so far this year, evenly matched against 22 outflows – four fewer inflows and four 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 – as has been the case this year – there were some relatively 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 the junk primary market over the past several years, including last year, when 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.

This year’s primary issuance, driven by ample liquidity, has been fairly robust for most of the year – the sixth consecutive year that total issuance of new U.S. dollar-denominated, fully junk-rated bonds from domestic or industrialized-country issuers has topped the $200 billion mark. It slowed markedly over the last several months from its frenetic first-half pace amid an upturn in financial market volatility, but is on track this week toward having one of its busiest weeks of the year.

According to data compiled by Prospect News, some $246.30 billion of such paper had priced in 385 tranches as of Thursday’s close, running about 12.9% behind the $282.90 billion that had priced in 522 tranches by this point on the calendar in 2014.

From around mid-year, this year’s issuance pace dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago and has only begun to pick up again just recently.

Secondary market performance has also been helped by the flows of cash into the funds, and into the broader market as well, although both last year and this year, performance turned erratic in the latter part of the year.

Secondary market performance, as measured by widely followed indexes, began to weaken 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.

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 apart from a small and short-lived subsequent blip back upward, they stayed in the red for a number of weeks, only getting back into the black in the second half of October, after having hit their lows for the year earlier in the month.

Corporate funds lose momentum

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net outflow of $357.8 million during the week ended Wednesday, according to Lipper.

That downturn broke a string of three consecutive inflow the funds had seen. There was the inflow of $235.8 million reported last Thursday for the week ended Oct. 28, an $874 million inflow for the week ended Oct. 21 and a $1.11 billion cash gain recorded during the week ended Oct. 14, which broke a string of four consecutive outflows from the funds, including the $941 million outflow seen in the Oct. 7 week.

Before that had come a $3.62 billion cash hemorrhage reported during the week ended Sept. 30 – the largest such outflow on record, according to Lipper. It had topped the previous largest flood of net redemptions – the $3.52 billion downturn seen the week before that, ended Sept. 23.

The losing streak also saw a cash loss of $737.15 million in the week ended Sept. 16.

The latest week’s outflow was the sixth in the last 10 weeks going back to Sept. 1, against four inflows in that time, according to a Prospect News analysis of the data.

Despite that recent weakness, inflows have still now been seen in 26 weeks out of the 44 since the start of the year, against 18 weeks of outflows.

The year-to-date net inflow number declined this week to $14.36 billion from $14.72 last week, Lipper said.

In 2014, the funds generated $86.111 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 15th consecutive downturn this week, as some $395.1 million more left those funds than came into them.

That slide followed last week’s outflow of $164 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 $10.027 billion from $9.63 billion last week, according to Lipper.

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