Junk funds see $1 billion outflow, second consecutive large loss

By Paul Deckelman

New York, March 19 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – have seen their second consecutive big weekly outflow, 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 billion more left those funds than came into them during the week ended Wednesday.

This week’s outflow followed the $1.96 billion cash loss 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 11.

Those two outflows, in turn, had followed six consecutive weekly inflows reaching back to the end of January and totaling $11.41 billion, according to a Prospect News analysis of the data.

That winning streak had started with a $2.77 billion cash surge recorded during the week ended Jan. 28, which was then followed by inflows of $2.67 billion during the week ended Feb. 4, $2.94 billion during the week ended Feb. 11, $1.64 billion during the week ended Feb. 18, $1.09 billion during the week ended Feb. 25 and concluding with a more modest $309 million cash injection during the week ended March 4.

The massive cash cascade seen during the week ended Feb. 11 was not only the biggest seen so far this year, but it was 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 $2.441 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.

Last 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 last Dec. 17.

As had been the case last week, this week’s outflow did not come as any surprise. Traders were reporting daily outflows from the funds for most of the week, which began last Thursday.

A trader presciently predicted before the data was released that “I assume we’re going to have another negative number.”

Year’s total still positive

With 11 weeks in the books so far this year, the current week’s big outflow marked the fourth such cash loss in 2015. The only other outflow seen so far this year in addition to the downturns seen over the past two weeks and the outflow during the Jan. 7 week was a $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 $8.17 billion from the previous week’s $9.17 billion. It was down as well from the $11.12 billion peak net inflow level for 2015 so far, which was recorded the week ended March 4.

With two outflows seen in the first three weeks of the year, the cumulative fund flows figure for the nascent year had started in the red, only getting back into the black in late January and staying in positive territory since then, according to the data.

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.

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 around the 2% level.

One the new-deal front, according to data compiled by Prospect News, primary issuance of $80.78 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 114 tranches as of Thursday’s close, running 42.6% ahead of the new-deal pace seen a year ago, when $56.64 billion had priced in 118 tranches by this point on the calendar.

© 2015 Prospect News.
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