Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
Avenue Credit Strategies, for example, has plummeted 20 percent since November 2014, with its assets shrinking to less than $1 billion from almost $2 billion a year earlier. Nuveen High Income Bond Fund has lost 17 percent since last June while its assets have shrunk to about $322 million from more than $1 billion in 2014, according to data compiled by Bloomberg.
Franklin High Income Fund has shrunk from a high of $7.2 billion in June 2014 to $4.6 billion at the end of December, the data show.
These mutual funds have some things in common: They own big slices of lower-rated, harder-to-trade bonds, including those tied to energy companies, and their assets have contracted steadily. It’s a recipe for deepening pain at a time when oil prices have plunged to about $30 a barrel from more than $100 less than two years ago and the lowest-rated bonds have lost more than 17 percent in six months.
If funds own unwanted bonds and are suddenly forced to sell them -- to accommodate redemption requests, for example -- the next sound they hear is a giant sucking downward spiral, particularly if they own a lot of a particular rarely traded bond. This trend is sounding a note of alarm throughout the mutual fund industry.
The U.S. Securities and Exchange Commission is investigating junk-bond funds that promise investors the ability to redeem cash daily to determine whether they can adequately meet mass withdrawals in a pinch. The agency has made such examinations one of its priorities this year in the wake of the closing of Third Avenue's Focused Credit Fund late last year. (That $788.5 million fund blocked client withdrawals to avoid dumping bonds at fire-sale prices.)
If you take a step back, you'll see a widening gap in investor appetite between the haves and the have-nots, with funds that have performed well receiving money and those that haven't receiving withdrawals.
For example, the Eaton Vance High Income Opportunities Fund, which has performed better than 96 percent of its peers in the past three years, has grown to about $780.8 million from $449 million of assets in September 2013, Bloomberg data show. The fund, which has gained 9.4 percent since 2012, has expanded even as some of its peers contract.
This is a fairly typical, predictable trend of investors rewarding the best-performing funds with more cash, but it's playing out in a way it hasn't before in the $1.3 trillion U.S. high-yield market. Investors poured more than $900 billion into taxable-bond mutual-fund flows on the heels of the Federal Reserve's unprecedented stimulus. Now, as the Fed starts raising rates and the credit cycle appears to be turning, some investors are pulling their money out.
So what’s the takeaway? For years, there's been considerable concern about what happens when mom-and-pop investors flee mutual funds, especially after they poured record amounts of money into debt that's traded relatively infrequently. The concerns are coming to fruition in pockets; they were real and justified.
But as it has played out so far, the bifurcation in the high-yield fund market has helped shield it from an even deeper world of hurt. Unless there's a catalyst to prompt investors to yank out cash in a more wholesale manner from all junk-debt funds, this will go down as having been a somewhat orderly exit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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