Junk funds gain $3.34 billion in week, their biggest inflow this year

By Paul Deckelman

New York, Oct. 21 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, showed major net additions by investors in the latest reporting week. It was the third consecutive week in which inflows have been seen, bouncing back from the heavy net redemptions reported three weeks ago.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $3.34 billion million more came into those weekly-reporting-only funds than left them during the week ended Wednesday.

That was more than double the $1.48 billion cash gain that was reported last week for the seven-day period ended Oct. 14 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

The three-week winning streak – boasting inflows totaling $5.55 billion – also includes a $735 million cash injection seen during the week ended Oct. 7.

That earlier inflow followed the only recently seen net outflow, a $2.15 billion cash loss that was recorded during the week ended Sept. 30.

This week’s inflow was the sixth in the last seven weeks, according to a Prospect News analysis of the data. Besides the inflows seen over the last three weeks, that recent show of strength also includes three straight weeks of cash gains totaling $439.88 million before the most recent loss: $17.7 million during the week ended Sept. 23, $236.38 million during the week ended Sept. 16 and $185.8 million during the week ended Sept. 9.

Those three inflows, in turn, had followed two straight weeks of outflows before that totaling $1.83 billion: a $227 million cash loss for the week ended Sept. 2 and a $1.60 billion downturn during the week ended Aug. 26.

Over the last 10 weeks dating back to the week ended Aug. 19, there have been seven inflows and three outflows. Over the last 26 weeks dating back to the week ended April 29, the funds have been evenly split with 13 inflows and 13 outflows, the analysis indicated.

YTD flows back in the black

On a longer-term basis, however, with 42 weeks in the books so far this year, there have been 24 inflows seen against 18 outflows.

On a cumulative basis, this week’s huge inflow swung the funds’ cumulative total for the year so far back to the plus side, with a $559 million 2015 net inflow, versus the $2.78 billion net outflow seen last week – although that year-to-date deficit had narrowed from its worst level of the year according to the analysis, the $5 billion cumulative outflow that had been seen in the week ended Sept. 30.

Going back to the beginning of the year, 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 data analysis, but then stayed in positive territory for most of the several months after that, reaching a peak 2015 cumulative inflow level of $11.48 billion during the week ended April 15.

However, things started to go downhill after that, with net inflows steadily deteriorating from the peak until they were last seen during the week ended July 29, when the funds were still in the black to the tune of $849.09 million. Cumulative fund flows tumbled back into negative territory for the first time since January during the week ended Aug. 5, showing a $351.91 million net outflow for the year at that point, and the year-to-date total stayed in the red after that until this week.

In 2014, inflows were 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 big gain

Another fund-tracking service, Cambridge. Mass.-based EPFR Global, meanwhile saw an inflow of close to $4 billion in the latest week, a market source said. It was the biggest inflow it has recorded since the week ended Feb. 11, when $4.16 billion more came into the funds that it tracks then left them, the source indicated.

This week’s inflow follows a roughly $2.5 billion cash gain, the source said, which had been the first such inflow seen by EPFR after three straight weeks of outflows before that.

The most recent of these was a $2.5 billion outflow seen in the week ended Oct. 7.

Before that, during the week ended Sept. 30, the company had posted an outflow “about one-third bigger” than that reported by AMG/Lipper, the source said, while in the week ended Sept. 23, the source put the cash loss in the $250 million range, noting “redemptions from high-yield funds with global and European mandates.”

During the week ended Sept. 16, the source had seen an inflow of under $100 million, which had broken a string of seven consecutive weeks of outflows before that, according to a Prospect News analysis of the data, including a monster outflow of $4.93 billion during the week ended Aug. 26.

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 source said that this week, U.S. high-yield flows were “the biggest since the 2013 third quarter.”

Last week, he said, “around 50%” of the total inflow had been attributable to dedicated U.S. high-yield funds.

During the Oct. 7 week, the source said, EPFR’s U.S.-domiciled funds had seen a net outflow of a little over $520 million, with the rest of the $2.5 billion of red ink racked up by the funds “with European and global mandates.”

While the two services’ respective weekly results usually point pretty much in the same direction, that hasn’t always been the case; there have been a number of weeks so far this year, most recently in the Oct. 7 week, in which one of the services saw an inflow and the other an outflow.

The overall net effect has been that EPFR has now seen 20 inflows so far this year, against 22 outflows – four fewer inflows and four more outflows than its rival, according to the Prospect News analysis of the two companies’ figures.

The two services meanwhile both saw inflows in 31 weeks versus 21 outflows last year, according to the analysis, although in the course of reaching those totals – as has been the case this year – there were some relatively rare weeks when AMG/Lipper showed outflows while EPFR saw overall inflows or vice versa.

Flows 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 $1.6 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 the junk primary market over the past several years, including last year, when 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.

This year’s primary issuance, driven by ample liquidity, has been fairly robust for most of the year, although it slowed markedly in recent weeks from its earlier frenetic pace amid an upturn in financial market volatility.

According to data compiled by Prospect News, $229.20 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 364 tranches as of Thursday’s close, running about 14.8% behind the $269.08 billion that had priced in 501 tranches by this point on the calendar in 2014.

This year’s issuance pace recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago and has only begun to pick up again just recently.

Secondary market performance has also been helped by the flows of cash into the funds and into the broader market as well, although both last year and this year, performance turned erratic in the latter part of the year.

Secondary market performance, as measured by widely followed indexes, began to weaken 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.

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 starting in June, the junk market gave all of that back and then some. By late August, returns had dipped into negative territory for the first time since mid-January, and apart from a small and short-lived subsequent blip back upward, they stayed in the red for a number of weeks, only getting back into the black this week after having hit their lows for the year earlier this month.

Corporates funds extend gains

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net inflow of $874 million during the week ended Wednesday.

That followed a $1.11 billion cash gain recorded last week, which broke a string of four consecutive outflows from the funds, including the $941 million outflow seen in the Oct. 7 week.

Before that had come a $3.62 billion cash hemorrhage reported during the week ended Sept. 30, the largest such outflow on record, according to Lipper. It had topped the previous largest flood of net redemptions, the $3.52 billion downturn seen the week before that, ended Sept. 23.

The losing streak also saw a cash loss of $737.15 million in the week ended Sept. 16.

The latest week’s inflow was only the third in the last 13 weeks, against 10 downturns – a skid otherwise interrupted only by the $416 million inflow reported during the week ended Sept. 9, which had been the first such cash gain after six consecutive weeks of outflows before that, according to a Prospect News analysis of the data.

Despite that recent weakness, inflows have still now been seen in 25 weeks out of the 42 since the start of the year, against 17 weeks of outflows.

The year-to-date net inflow number firmed this week to $14.48 billion from $13.61 billion last week, the analysis indicated.

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

© 2015 Prospect News.
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