Junk funds see $1.09 billion inflow for week, fifth huge inflow in row

By Paul Deckelman

New York, Feb. 26 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, saw their fifth billion-dollar-plus inflow in as many weeks, market sources said Thursday.

That gain extended and strengthened the flows’ already-solidly positive footing for the year to date.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $1.09 billion more came into those funds than left them during the week ended Wednesday.

That followed the $1.64 billion 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 Feb. 18.

Before that came a trio of inflows each topping the $2 billion mark: the massive $2.94 billion cash cascade seen during the week ended Feb. 11, the $2.67 billion net inflow in the week ended Feb. 4 and the $2.77 billion cash surge recorded during the week ended Jan. 28.

The Feb. 11th inflow was not only the biggest seen so far this year but also the fourth-largest weekly cash injection seen since the company began tracking the funds in 1992, according to a Prospect News analysis of the data. The Jan. 28th inflow was the fifth-biggest, while the Feb. 4th inflow was tied for the sixth-biggest with an identically sized $2.67 billion net cash gain that had come into the funds during the week ended July 17, 2012.

The three giant-sized inflows meanwhile easily surpassed the net $2.44 billion that had come into the funds during the week ended Nov. 15, 2014 – last year’s biggest inflow, according to the data – and were the biggest seen since the net $3.1 billion that came into the funds in the week ended Sept. 25, 2013, which was the third-biggest all-time inflow.

Taken together, the five big back-to-back inflows, totaling $11.1 billion, have now more than fully offset the pattern of weakness that had been seen in the fund flows from early December to mid-January, coinciding with the great volatility the high-yield market showed during that time in the wake of sharply sliding oil prices and their negative impact on junk-rated energy companies.

During the week ended Jan. 21, the funds had seen a $241.3 million outflow – the seventh such downturn in the previous eight weeks, a losing streak interrupted only by an $879.5 million inflow during the week ended Jan. 14. Before that had come six consecutive outflows totaling $8.05 billion, according to the analysis; counting that previous inflow and the outflow that followed it, the funds had lost a net $7.41 billion during the eight-week stretch before the recent rally, according to the analysis.

Yearly total solidly positive

The current week’s big inflow moved cumulative fund flows for the year so far further into solidly positive territory.

It was the sixth inflow seen so far this year, matched against two 2015 outflows – the $241.3 million in the Jan. 21 week plus a $922 million cash loss recorded in the year’s first week, ended Jan. 7.

It brought the year-to-date net inflow total up to $10.81 billion from the previous week’s $9.73 billion inflow for 2015. In late January, the cumulative fund-flows figure for the nascent year had moved back into the black after having three consecutive weeks of red ink before that, according to Lipper.

In 2014, inflows had been seen in 31 weeks, versus 21 weeks of outflows, according to the analysis.

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 another cash surge

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime saw what a market source estimated as an over $2 billion inflow in the latest week, on top of last week’s similar-sized cash addition.

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.

The two services’ respective weekly results usually point pretty much in the same direction, with EPFR, like AMG/Lipper, having now seen six inflows versus two outflows so far this year and having also seen inflows in 31 weeks versus 21 outflows last year, according to a Prospect News analysis of those figures, the same as AMG/Lipper.

However, that has not always strictly been the case. In 2014, as in years before that, there were some rare weeks when AMG/Lipper showed outflows and 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 before the last five weeks, the secondary market initially struggled, producing only modestly positive results, although it seems to have lately found its footing, with annualized returns now fast closing in on the 3% mark.

According to data compiled by Prospect News, primary issuance of $50.37 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 78 tranches as of Thursday’s close, running 37.9% ahead of the new-deal pace seen a year ago, when $36.51 billion had priced in 71 tranches by this point on the calendar.

Corporates continue climb

Looking at the fund flows for other asset classes, investment-grade corporate bond funds saw a $1.32 billion inflow for the week, on top of the previous week’s $2.99 billion cash addition. It was the funds’ eighth straight weekly gain and their ninth in the last 10 weeks.

The latest week’s gain brought the high-grade funds’ year-to-date net inflow figure to $19.48 billion from $18.16 billion last week, according to the Lipper figures.

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

However, the leveraged-loan participation funds – which had actually seen a rare upturn last week – reverted to their usual form this week with a $118.2 million outflow, versus last week’s $129.9 million inflow.

That inflow had been the first such cash gain after a 31-week losing streak dating back to last July.

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

With eight 2015 reporting weeks in the books, the loan funds have seen $2.67 billion of net outflows so far, versus the prior week’s $2.56 billion total.

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

© 2015 Prospect News.
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