Refinitiv Lipper Chart of the Week: Net Outflows Continue for Loan Participation Funds

Funds in Refinitiv Lipper’s Loan Participation (LP) classification (including both mutual funds and ETFs) had net negative flows of $117 million for the fund-flows week ended Wednesday, August 26. This is the continuation of a long-term fund-flows trend for this peer group as they’ve experienced net outflows for the lion’s share of the fund-flows weeks since the fourth quarter of 2018. This has resulted in the LP classification recording its worst annual net outflow ever (-$37.7 billion) in 2019 and being on pace to post its second-worst this year, as they’ve had $23.7 billion leave their coffers for the year to date. Investor demand for this peer group is tied directly to the Federal Reserve’s actions on interest rates.

The LP classification is comprised of funds that invest primarily in bank loans. Bank loans have floating interest rates – which means that as the Fed raises interest rates the yield on an LP fund will go up and vice versa. Starting in the fourth quarter of 2015, the Fed embarked on a rate hike program that raised the federal funds rate from near zero to a range of 2.25% to 2.50%. This program culminated with four separate 25 basis point (bps) increases in 2018, but in the fourth quarter of 2018 the Fed also gave indications that its tightening cycle would be coming to an end as it reduced its 2019 forecast down to two rate increases from three. This was a signal for investors to pull money out of bank loan funds which resulted in the peer group having its worst fund flows quarter in its history with net outflows of -$21.1 billion. The net negative flows for LP funds have continued to date as the Fed moved from raising rates to cutting them. Instead of the two rate increases in 2019, the Fed actually reduced them three times (25 bps each time) over the course of the year. This year the Fed was forced to make two well-publicized emergency rate cuts in Q1 to try to fight the economic impact of COVID-19 which has resulted in interest rates being reduced to near zero.

Since the end of the first quarter, mutual funds (-$7.7 billion) have been responsible for all of the net negative flows for the LP classification as ETFs have actually recorded a slight net inflow (+$87 million). The net outflows among the LP mutual funds have been paced by Lord Abbett Floating Rate Fund (-$1.0 billion), Fidelity Advisor Floating Rate High Income Fund (-$892 million), and Invesco Oppenheimer Senior Floating Rate Fund (-$847 million).