February 1, 2020

Investors Flee High Yield Debt Funds

by Pat Keon, CFA.

Lipper’s high yield funds peer groups (including both mutual funds and ETFs) experienced net outflows of $2.9 billion for the fund-flows week ended Wednesday, January 29, 2020. This was the worst weekly result for the group in more than five months (when it registered net negative flows of $4.1 billion for the fund-flows week of August 7, 2019) and was a reversal of a trend from the first several weeks of the year. Before this week, the high yield funds group had attracted $3.6 billion of net new money in 2020 on the heels of positive annual net flows of $18.9 billion (fourth highest annual result in the group’s history) in 2019.

It appears that a contributing factor to the decreased appetite for risk from fund investors could be the coronavirus outbreak. It became apparent in the past week that China did not have the outbreak contained as the number of reported illnesses continued to grow around the world and the World Health Organization declared it a global public health emergency. The major U.S. equity indices reacted very negatively to this news due to the potential impact the virus could have on the world’s second-largest economy (China). The Dow Jones Industrial Average, S&P 500 Index, and NASDAQ Composite Index all retreated more than 2.0% in mid-week trading as fears about the virus worsened. High yield debt correlates more closely with stocks than it does with other taxable fixed income securities. This is due to the fact that high yield debt, also known as below investment grade debt or junk bonds, carries more risk (like stocks) than corporate investment grade debt or government issues.

The majority of this week’s net negative flows came from high yield ETFs (-$2.4 billion), with the largest individual net outflows belonging to iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$1.9 billion) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK, -$657 million). On the mutual fund side of things, BlackRock High Yield Bond Portfolio (-$191 million) and PGIM High Yield Fund (-$168 million) saw the most money leave.




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