High Yield Fund Flows - The correct number...

Earlier today, the headline number for AMG's fund flow for high yield mutual funds was reported at -$2.8 BILLION. Immediately, I knew something was wrong with that number. Despite having a number of high yield and leveraged loan deals (and repricing) been pulled from the market, the market didn't feel THAT bad. My Bloomberg lit up with traders also questioning the number.

With that said, here is what I've heard from the various desks:
  • UBS says there was a calculation issue and hears the consensus HY outflow was 830-850M
  • JPM says they estimate outflow at 830M with the glitch arising from reallocation of funds from liquidated to new/existing fund
  • And I am sure tomorrow morning, all the desks will put out something correcting the headline number
Last week, Goldman Sachs credit strategist Charles Himmelberg, one of my favorites, put out a piece entitled: "Mutual fund flows matter less, but still help track sentiment." I could not put that better. When liquidity is scant in the credit markets, inflows will indeed be very important. But in a market awash in liquidity, effects normalize. According to Goldman Sachs whereas in the wake of the Lehman crisis, $1B of inflows would impact HY returns by 4.5%, today those $1B of inflows would translate into 90 bps of performance.

In my opinion, and maybe I am thinking about this too simply (please correct me if so), fund flows will deteriorate on trailing periods of negative returns for an asset class. The retail investor will inevitably chase returns. And I think after the "Great Recession" they are more than ever chasing "risk-adjusted" returns. Think things like Sharp Ratio here. And compared to alternatives, high yield has done fairly well relative to other asset classes over the recent, and not so recent future.

With that said, unlike equities, high yield bonds have two distinct components of return. Rate and spread. In theory, credit spreads could compress to unheard of tight levels relative to IG or treasuries but that would portend a very robust economic environment which would more than likely be associated with inflationary pressures. Inflations leads to higher rate. And even though the duration of the high yield market is at a historical low and the "date to worst" is the near the shortest of all time, high yield assets will fall if rates increase, especially in the belly / 10 year part of the curve.

If rates rise, flows to credit funds will drop significantly. There is no two ways about it. Market participants will feel that shift before the data is reported. But retail investors will see negative returns because of rate (all else being equal) and pull money from the asset class which feeds on itself until yields hit appropriate levels compensating investors for rate risk.


Martha Jackson 3/25/2011  


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Bill 3/25/2011  

I agree, find it very hard to believe that number. The HY15s prob going end the week 3/8 to a half tighter and while that is mostly due to the roll and the wide skew last week, if that # was right would expect the HY15s to at least be wider (likely much wider). The lack of supply this week helped but HY has held in fairly well and I was expecting a -200 to -300 type # just because of the macro headlines.

Mostly agree with your thought process on inflation and credit returns. However, can't tell you how many sell side credit strategists have told me the same story about how HY will outperform in that environment because it is less rate sensitive and if rates move up its because the economy is doing well which is good for HY. The also tell a story about HY outperforms if rates go down as well. Apparently the only enviroment they can't describe is one where HY doesn't outperform. That has gotten me leaning the other way, slightly short HY in various ways but so far not been too profitable.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.