Junk funds see $1.885 billion outflow for week; year-to-date outflow expands

By Paul Deckelman

New York, Dec. 11 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – posted a huge net outflow in the latest week, their second consecutive such large downturn.

As activity was wrapping up on Thursday, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that some $1.885 billion more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

That followed the already sizable $859 million outflow reported the previous Thursday by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., covering the seven-day period ended Dec. 3.

Before the numbers came out, an analyst speculated that the latest week’s outflow would likely come in north of $1.5 billion. A high-yield trader at another shop agreed, saying that “we’ve seen accounts having to raise cash all week – so I’m expecting an outflow number at or bigger than what we saw last week.”

“I would expect it to be a much bigger number, because every day of the week, accounts have been raising cash for redemptions.”

The latest week’s massive outflow was the third such retreat seen over the last four weeks, a losing pattern interrupted only by a modest $44.487 million inflow recorded during the week ended Nov. 26. Before that, the fund-tracking service had seen a $280.7 million outflow during the week ended Nov. 19. That cash loss, in turn, had followed a four-week winning streak, dating back to mid-October, during which net inflows had totaled $6.606 billion, according to a Prospect News analysis of the figures.

Those inflows had included $890.2 million during the week ended Nov. 12, which had followed a $2.441 billion cash surge into the funds seen during the week ended Nov. 5 – the biggest such cash boost seen so far this year, according to the Prospect News analysis, surpassing the $2.224 billion inflow reported during the week ended Aug. 20. That massive inflow during the Nov. 5 week was also the fifth-biggest cash addition on record and the biggest seen since the funds gained $3.1 billion more than had left them during the week ended Sept. 25, 2013, which was the third-biggest gain ever, according to the analysis.

The Nov. 5 mega-inflow, in turn, had followed respectably heavy cash additions of $1.567 billion in the week ended Oct. 29 and $1.708 billion seen the week before that, ended Oct. 22.

Year-to-date outflow increases

On a longer-term basis, inflows have now been seen in 31 out of the 49 weeks since the beginning of the year, versus 18 weeks of outflows, according to the analysis.

However, despite that nearly 2-to-1 numerical edge for the inflows, cumulative fund flows for the year were negative, to the tune of $1.887 billion, nearly all of that attributable to the latest week’s cash loss. The year-to-date total had slipped into the red the week before with a miniscule $1.53 million year-to-date outflow, from the already relatively modest $857.497 million net inflow that AMG/ Lipper had reported during the Nov. 26 week.

A key factor in the negative year-to-date numbers – despite all of those weeks of gains – was the four straight weeks of massive outflows recorded between the week ended July 16 and the week ended Aug. 6. The latter week alone produced a record $7.068 billion money hemorrhage, the biggest the company had seen since it began tracking the fund flows back in 1992.

That sea of red ink more than wiped out what had been a positive year-to-date fund-flow pattern up to that point.

After that, things turned choppy, while the year-to-date total mostly remained on the downside, according to the analysis, only edging back into the black in early November, before heading back into negative territory in early December.

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.

In 2013 – which had 53 reporting weeks due to a statistical quirk – inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.274 billion, the analysis indicated.

EPFR sees huge outflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime saw an outflow in the latest week that was described by a market source as over $3.5 billion, more than double the slightly more than $1.4 billion cash decline seen the week before.

Those figures stood in marked contrast to the Nov. 26 week, when, according to the source, the service had shown a “mildly positive” inflow in the neighborhood of “$250 million or so.”

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual and exchange-traded funds, including strictly European junk funds and broader global funds, versus AMG/Lipper’s solely domestic orientation.

However, the market source said that in the latest week, the U.S.-based funds accounted for roughly two-thirds of the huge outflow.

Counting the latest week’s setback, EPFR has now recorded inflows in 31 weeks since the start of the year, versus 18 outflows, the same as AMG/Lipper, according to a Prospect News analysis of the figures. However, while the two services’ respective weekly results usually point pretty much in the same direction, that has not always been the case; there have been some 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 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 have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years, and which had mostly continued on into the first half of this year as well. Secondary performance was erratic during the recently ended third quarter and has remained so into the current fourth quarter, lately declining in line with big energy-sector losses, although new issuance has continued to run about neck-and-neck with last year’s near-record pace.

Loans lose, corporates climb

A market source meantime said that leveraged-loan funds saw outflows of $1.045 billion in the latest week, following the prior week’s $511.1 million downturn. It was the 22nd consecutive weekly outflow from those funds, which have seen $13.164 billion of cumulative red ink for the year so far.

Those funds have been struggling mightily since April, when an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end.

Investment-grade corporate bond funds, on the other hand, saw a net inflow this week of $2.01 billion, up from the previous week’s $1.27 billion inflow. The year-to-date corporate fund inflows figure swelled to $84.819 billion.

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