Junk funds see $859.1 million outflow, second consecutive downturn

By Paul Deckelman

New York, April 30 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, saw their second straight weekly outflow on Thursday after four consecutive weeks of inflows, market sources said.

That downturn brought the year-to-date net inflow position further off its 2015 high, but that cumulative total still remained robustly positive.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $859.1 million more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

That setback followed on the heels of the $162.2 million 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 April 22.

The two outflows, totaling $1.02 billion, in turn followed four consecutive weekly gains totaling $3.31 billion of net inflows during that time, according to a Prospect News analysis of the figures.

These included the last recent inflow of $791.6 million, which was recorded during the week ended April 15.

The week before that, ended April 8, the funds had seen a gain of $1.35 billion, which in turn had followed inflows of $315.2 million and $856 million during the weeks ended April 1 and March 25, respectively.

Meanwhile, the most recent prior high-yield funds outflow before the ones reported over the past two weeks had been the $1 billion cash loss seen during the week ended March 18.

Year’s net inflow still strong

With 17 weeks in the books so far this year, the current week’s outflow marked the sixth downturn seen so far in 2015 against 11 inflows.

It dropped the year-to-date net inflow total to $10.45 billion from $11.31 billion last week and from $11.48 billion in the week ended April 15, the peak cumulative inflow total so far.

With two outflows seen in the first three weeks of 2015, the cumulative fund flows figure for the nascent year had started in the red, only getting back into the black in late January, according to the Prospect News analysis of the data – but it has stayed in positive territory ever since then.

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.

EPFR sees outflow

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, saw “a small outflow overall,” a market source said – although he added that “European funds did see modest inflows.”

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. Last week, while AMG/Lipper was recording its $162.2 million outflow, the market source said that EPFR posted an inflow, pegging that cash gain at $375 million.

While before last week the two services’ results this year had been in tandem, after last week’s rare divergence, EPFR accordingly has now seen 12 inflows so far this year against five outflows, according to a Prospect News analysis of those figures – one additional inflow and one fewer outflow than AMG/Lipper.

The two services did both see inflows in 31 weeks versus 21 outflows last year, 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.

Inflows 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 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 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 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, although it seems to have lately found its footing, with annualized returns near their highs for the year so far, a little below the 4% mark.

According to data compiled by Prospect News, primary issuance of $128.01 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 194 tranches as of Thursday’s close, running 18.6% ahead of the new-deal pace seen a year ago, when $107.89 billion had priced in 203 tranches by this point on the calendar.

Corporates climb, loans lag

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an inflow of $1.53 billion for the week, their second consecutive big gain. They had risen by $1.37 billion the week before, rebounding from a rare outflow of $384.4 million during the week ended April 15. That outflow had been the first such downturn for the corporate funds this year after 14 consecutive weeks of posting inflows. The last previous outflow the high-grade funds had seen was their $1.22 billion loss for the week ended Dec. 31, 2014.

This week’s inflow raised the high-grade funds’ year-to-date net cash gain to $27.68 billion from the previous week’s $26.16 billion, according to the AMG/Lipper figures.

The year-to-date figure is now at a new peak level for the year so far, surpassing the previous zenith, which was set the week before.

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

Meanwhile, the leveraged-loan participation funds recorded a $54.7 million outflow on the week.

That snapped a rare two-week winning streak for the loan funds, with $35.1 million more coming into the funds than having left them during the week ended April 22 and a $529.9 million cash injection in the week ended April 15 – the grouping’s first such upturn after seven consecutive weeks on the downside.

Last week’s inflow was only the third seen so far this year against 14 outflows; the funds had also gained $129.9 million during the week ended Feb. 18, which had snapped a 31-week losing streak dating all the way back to last July.

Outside of the previous two weeks and the rare earlier inflow, the loan funds have been struggling mightily for the past year, when an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end.

The loan funds have seen $3.36 billion of net outflows so far this year, worse than last week’s $3.30 billion cumulative loss but not quite as bad yet as $3.87 billion seen the week ended April 8, their biggest cumulative loss for the year so far.

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

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