Junk funds see $162.2 million outflow, first downturn after four gains

By Paul Deckelman

New York, April 23 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, saw their first weekly outflow on Thursday after four consecutive weeks of inflows, market sources said.

That downturn slightly dented their still-robust year-to-date net inflow position, bringing it off its 2015 high.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $162.2 million more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

That setback followed four consecutive weekly gains totaling $3.31 billion of net inflows.

These included the $791.6 million cash injection reported last Thursday by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., for the seven-day period ended April 15.

The week before that, ended April 8, the funds had seen a gain of $1.35 billion, which in turn had followed inflows of $315.2 million and $856 million during the weeks ended April 1 and March 25, respectively.

Meanwhile, the most recent prior high-yield funds outflow before the one reported on Thursday had been the $1 billion cash loss seen during the week ended March 18.

Year’s net inflow still strong

With 16 weeks in the books so far this year, the current week’s outflow marked just the fifth downturn seen so far in 2015 against 11 inflows.

It dropped the year-to-date net inflow total to $11.31 billion from $11.48 billion the previous week – the peak cumulative inflow total so far.

With two outflows seen in the first three weeks of 2015, the cumulative fund flows figure for the nascent year had started in the red, only getting back into the black in late January, according to a Prospect News analysis of the data, but it has stayed in positive territory ever 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 sees inflow

While the AMG/Lipper data for the high-yield funds was pointing southward, another fund-tracking service, Cambridge, Mass.-based EPFR Global, saw an inflow, with a market source pegging the cash gain at $375 million.

That followed inflows of more than $1 billion last week and “a little over $2 billion” the week before that, the source said.

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, this week represented a rare divergence from that pattern, with EPFR having now seen 12 inflows so far this year, against four outflows, according to a Prospect News analysis of those figures – one additional inflow and one fewer outflow than AMG/Lipper.

The two services did both see inflows in 31 weeks versus 21 outflows last year, 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.

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 was 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 turned 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 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, although it seems to have lately found its footing, with annualized returns now at or near their highs for the year so far, approaching the 4% mark.

According to data compiled by Prospect News, primary issuance of $122.88 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 183 tranches as of Thursday’s close, running 17.8% ahead of the new-deal pace seen a year ago, when $104.31 billion had priced in 192 tranches by this point on the calendar.

Corporates rebound

Looking at the fund flows for other asset classes, investment-grade corporate bond funds rebounded from a rare loss reported last week, posting a $1.37 billion inflow for the week. That was in sharp contrast to the $384.4 million outflow suffered in that prior week. That outflow had been the first such downturn for the corporate funds this year after 14 consecutive weeks of posting inflows. The last previous outflow the high-grade funds had seen was their $1.22 billion loss for the week ended Dec. 31.

The inflow raised the high-grade funds’ year-to-date net inflow to $26.16 billion, up from the previous week’s $24.78 billion, according to the Lipper figures.

The year-to-date figure is now at a new peak level for the year so far, surpassing the previous zenith of $25.17 billion reported two weeks ago during the week ended April 8.

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

Meanwhile, the usually beleaguered leveraged-loan participation funds posted their second consecutive weekly advance, a $35.1 million inflow, following up last week’s $529.9 million inflow, which had been the grouping’s first such upturn after seven consecutive weeks on the downside before that.

This week’s inflow was only the third seen so far this year against 13 outflows; the funds had also gained $129.9 million during the week ended Feb. 18 – which had snapped a 31-week losing streak dating all the way back to last July.

Outside of the past two weeks and the rare earlier inflow, the loan funds have been struggling mightily for the past year, when an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end.

The loan funds have seen $3.30 billion of net outflows so far this year – an improvement from the prior week’s $3.37 billion total and from $3.87 billion the week before, their biggest cumulative loss for the year so far.

In 2014, the funds racked up cumulative red ink for the year of $17.26 billion.

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