Junk funds see $621 million inflow in week, breaking two-week skid

By Paul Deckelman

New York, June 25 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, turned higher this week, posting their first inflow after two straight outflows totaling nearly $5.5 billion.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $621 million more had come into those weekly-reporting-only funds than had left them during the week ended Wednesday.

This week’s inflow represented a rebound from the sharply negative pattern seen last week, when a $2.89 billion cash loss was reported for the seven-day period ended June 17 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

That downturn had followed a $2.56 billion plunge the week before, ended June 10.

Those back-to-back outflows totaled $5.45 billion.

Last week’s massive cash hemorrhage, besides being second in a row, was also the third such loss in the previous four weeks and the seventh such setback in nine weeks, according to a Prospect News analysis of the figures.

It was not only the biggest outflow seen so far this year, eclipsing the $2.75 billion cash loss seen in the week ended May 6, the previous peak outflow level for the year, but it was also the biggest outflow seen since the week ended Dec. 17, 2014, when $3.08 billion more left the funds than came into them.

The last previous positive fund flows number was $600.8 million during the week ended June 3.

Year’s net inflow rises

With 25 weeks in the books so far this year, the current week’s inflow marked the 14th such gain seen so far in 2015 against 11 outflows.

It raised the year-to-date net inflow total to $4.19 billion from $6.57 billion last week.

However, that year-to-date total remains well below the $11.48 billion seen during the week ended April 15, the peak cumulative inflow total so far.

Two outflows were seen in the first three weeks of 2015, starting the cumulative fund flows figure for the nascent year off in the red. It only got 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 an outflow

Another fund-tracking service, the Cambridge. Mass.-based EPFR Global, meanwhile saw an outflow of less than $70 million, a market source said.

It was the third consecutive outflow seen by the service, following outflows of a little over $4 billion last week and almost $3 billion the week before that.

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; besides this week’s divergence, there had also been a divergence during the week ended May 27, with EPFR showing an inflow of a little more than $400 million while AMG/Lipper recorded a $111.1 million outflow.

And there had also been a similar divergence during the week ended April 22, which saw EPFR post a $375 million inflow while AMG/Lipper recorded a $162.2 million outflow.

While the two services’ results this year had been in tandem prior to April 22, after those three relatively uncommon divergences, EPFR accordingly has now seen 15 inflows so far this year against 10 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 has been 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 a little 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. After that, the market seemed to find its footing, with year-to-date returns seen to have pushed above the psychologically significant 4% mark by the end of May. But June has seen something of a retrenchment, with the cumulative returns currently back around the 3% region.

However, primary issuance remains fairly robust. According to data compiled by Prospect News, $182.43 billion of new U.S. dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 294 tranches as of Thursday’s close, running some 4.9% ahead of the new-deal pace seen a year ago, when $173.91 billion had priced in 323 tranches by this point on the calendar.

Corporates lower again

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an outflow of $366 million for the week. It was the third straight downturn for the funds, which had retreated by $161.2 million last week and $110 million in the week ended June 10 – the first time the asset class had seen three straight weekly inflows since August 2011.

It was also the fourth outflow in the past five weeks for the high-grade funds.

Inflows have now been seen in 19 weeks out of the 25 since the start of the year against just six outflows.

This week’s outflow lowered the high-grade funds’ year-to-date net cash gain to $28.51 billion from last week’s $28.88 billion and from the peak level for 2015 so far, $29.15 billion during the week ended June 3.

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

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