Junk funds show $1.72 billion outflow, first loss after three gains

By Paul Deckelman

New York, July 30 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, turned profoundly negative this week, snapping a three-week winning streak.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $1.72 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

That was a sharp reversal from the $81.8 million net inflow that was reported last week for the seven-day period ended July 22 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division – $93 million more coming into traditional managed high-yield mutual funds than had left them that week, partly offset by an $11 million net loss from the ETFs.

That inflow, the third consecutive weekly improvement for the funds and the fourth over the previous five weeks, had followed the robust $1.23 billion inflow in the week ended July 15.

That gain, in turn had followed a modest $45.08 million cash addition recorded during the week ended July 8.

The three inflows, totaling $1.36 billion, meanwhile followed the yawning $2.98 billion outflow reported the week before that, ended July 1, the most recent prior outflow before this week’s slide.

That massive outflow had been the biggest such downturn seen so far this year, eclipsing the $2.89 billion cash loss recorded during the week ended June 17 and was also the largest seen since the week ended Dec. 17, 2014, when $3.08 billion more left the funds than came into them.

Despite the cluster of recent inflows seen before this week, things have recently been more negative as a rule. This week’s outflow, for example, was the ninth seen in the past 15 weeks, according to a Prospect News analysis of the figures.

Year’s net inflow deteriorates

On a longer-term basis, with 30 weeks in the books so far this year, the current week’s outflow marked the 13th such weekly cash loss, versus 17 cash gains since the year began.

It lowered the year-to-date net inflow total down to $851 million from $2.57 billion last week.

The year-to-date total meanwhile 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.

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 and July saw a definite retrenchment, with the cumulative returns falling as low as around 1% earlier in the month, although they have recently moved back up and are closer to 2%.

Primary issuance, driven by ample liquidity, has been fairly robust for most of the year, although it has recently slowed.

According to data compiled by Prospect News, $190.16 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 309 tranches as of Thursday’s close – although that pace has recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago. This year’s totals now lag about 5% behind the $200.75 billion that had priced in 380 tranches by this point on the calendar in 2014.

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