Junk funds break three-week skid, gain $111 million in latest week

By Paul Deckelman

New York, Aug. 20 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – broke out of their recent rut, finally posting a net inflow after three consecutive weeks of billion-dollar-plus outflows.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $111.3 million more had come into those weekly reporting-only funds than had left them during the week ended Wednesday.

That stood in contrast to the three consecutive weekly outflows seen before that, totaling some $4.14 billion.

These included the $1.214 billion net decline that was reported last week for the seven-day period ended Aug. 12 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division, which had followed an almost identically sized $1.201 billion outflow during the week ended Aug. 5, and before that, $1.72 billion cash loss in the week ended July 29.

That earlier outflow, in turn, had snapped a three-week winning streak before that totaling $1.36 billion – a modest $45.079 million cash addition recorded during the week ended July 8, followed by the robust $1.232 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.

Even counting the latest inflow, though, things have lately been considerably more negative as a rule. The upturn was only the seventh such gain seen in the last 18 weeks, versus 11 outflows, according to a Prospect News analysis of the figures.

Year-to-date outflow moderates

On a longer-term basis, with 33 weeks in the books so far this year, the current week’s inflow marked the 18th weekly cash gain, versus 15 weekly losses since the year began.

It slightly decreased the year-to-date net outflow the funds have seen to $1.455 billion from the $1.566 billion cumulative deficit observed last week – the funds’ nadir for the year so far.

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 $11.476 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 million. Fund flows tumbled back into the red for the first time since January during the week ended Aug. 5, showing a $352 million net outflow for the year at that point, and have stayed on the downside 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 stays negative

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw “outflows again” in the latest week, a market source said, pegging the size of the loss “a little north of $750 million.”

It was the fourth consecutive outflow seen by the EPFR-tracked funds, according to a Prospect News analysis of the data.

Last week, the source had said that the outflow that week was “very similar” in size to the $1.214 billion decline reported by AMG/Lipper, although the week before that, ended Aug. 5, the source said that the EPFR-tracked funds had racked up an outflow only “about one-fifth” the $1.201 billion cash loss seen that week by AMG/Lipper, probably due to the fact that the European high-yield funds that it tracks “were still attracting money,” even as money was flowing out of domestic high-yield funds.

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 five 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 16 outflows – one fewer inflow and one more outflow 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 since June, there has been a definite retrenchment, with year-to-date returns now flat at best or even in negative territory, depending upon the index used.

Primary issuance, driven by ample liquidity, has been fairly robust for most of the year, although it has slowed somewhat recently.

According to data compiled by Prospect News, $205.43 billion of new U.S. dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 335 tranches as of Thursday’s close – a virtual statistical dead heat with the $205.52 billion which had priced in 396 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 keep sliding

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net outflow of $1.088 billion during the week ended Wednesday.

It was the fourth consecutive outflow for the corporate bond funds, following on the heels of last week’s $1.848 billion cash hemorrhage – the biggest weekly drop seen since June of 2013.

Before that, the funds had seen outflows of $1.26 billion in the week ended July 29 and $740.2 million during the week ended Aug. 5.

Those four outflows, in turn, had followed three straight inflows, including $889 million in the week ended July 22. The funds also gained $267 million during the week ended July 15, on top of a $1.093 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 22 weeks out of the 33 since the start of the year, against 11 weeks of outflows. The year-to-date net inflow number stood at $25.172 billion, down from last week’s $26.26 billion, according to a Prospect News analysis of the figures.

In 2014, the funds generated $86.111 billion of net inflows for the year.

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