Junk funds see $1.96 billion outflow for week after six weeks of gains

By Paul Deckelman

New York, March 12 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, saw their first outflow in seven weeks this week, market sources said Thursday.

That setback put a dent in the flows’ solidly positive footing for the year to date.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $1.96 billion more left those funds than came into them during the week ended Wednesday.

It was the first outflow after six consecutive weekly inflows reaching back to the end of January.

This week’s outflow followed the $309 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 March 4.

Before that were inflows of $1.09 billion during the week ended Feb. 25, $1.64 billion during the week ended Feb. 18 and before that 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. 11 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. 28 inflow was the fifth-biggest, while the Feb. 4 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, according to the data.

Taken together, the six back-to-back inflows totaled $11.41 billion.

This week’s outflow was meanwhile the biggest seen so far this year, eclipsing the $922 million downturn recorded during the week ended Jan. 7, the data indicated.

It was the largest junk market outflow since the $3.08 billion cash loss seen during the week of Dec. 17.

This week’s outflow did not come as any surprise, since traders were reporting daily outflows from the funds for most of the week, which began last Thursday. By Monday, they said, those cumulative outflows were totaling at least $1 billion.

A trader said that the outflow “came in at the high end” of market expectations of a cash drain of between $1 billion and $2 billion.

Year’s total solidly positive

With 10 weeks in the books so far this year, the current week’s big outflow marked the third such cash loss in 2015. The only other outflow seen so far this year in addition to this week’s and the outflow during the Jan. 7 week was the $241.3 million decline in the week ended Jan. 21.

There have meanwhile been seven weekly gains since the start of the year: the recent six straight inflows plus an $879.5 million upturn in the week ended Jan. 14.

This week’s outflow dropped the year-to-date net inflow total to a still-impressive $9.17 billion from the previous week’s $11.12 billion, the peak net inflow level for 2015 so far.

In late January, the cumulative fund-flows figure for the nascent year had moved back into the black after having opened the year with three consecutive weeks of red ink before that, according to Lipper.

In 2014, inflows were 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 cash downturn

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime also saw its first outflow after six straight weeks of inflows. However, a market source said that the downturn was “somewhat less” than the cash drain that AMG/Lipper had reported.

He explained that “strong flows into European high-yield funds offset redemptions from U.S. 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.

The two services’ respective weekly results usually point pretty much in the same direction, with EPFR, like AMG/Lipper, having now seen seven inflows, including the previous week’s $2.42 billion cash injection, versus three outflows so far this year. It also saw 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 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 before the six-week inflow streak, the secondary market initially struggled, producing only modestly positive results, although it then appeared to find its footing, with annualized returns briefly moving above the 3% mark as February blended into March. Since then, though, the junk market has given up some of those gains, with returns now hovering in the lower 2% range.

One the new-deal front, according to data compiled by Prospect News, primary issuance of $65.73 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 103 tranches as of Thursday’s close, running some 25.5% ahead of the new-deal pace seen a year ago, when $52.36 billion had priced, also in in 103 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 $571.49 million inflow for the week, on top of the previous week’s $1.64 billion cash addition. It was the funds’ 10th straight weekly gain and their 11th in the last 12 weeks.

The latest week’s gain brought the high-grade funds’ year-to-date net inflow figure up to $21.69 billion from $21.12 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 reported a $31.01 million outflow, versus last week’s $195.6 million cash loss.

It was the third consecutive outflow for the loan funds, following a rare $129.9 million inflow during the week ended Feb. 18.

That inflow, in turn, had been the first such cash gain for loan funds 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.

The loan funds have seen $2.90 billion of net outflows so far this year, versus the prior week’s $2.87 billion total.

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

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