Lipper’s Loan Participation Funds (LP) peer group saw $3.3 billion and $2.5 billion leave their coffers for the fund-flows trading weeks ended December 19 and December 12, respectively. These numbers represent the two worst weekly net outflows in the peer group’s history (Lipper tracks this data back to 2003) and reduced its year-to-date net inflows to $5.4 billion. The group has seen net outflows of more than $1.0 billion for the last five weeks for a total net outflow of $9.9 billion for the time period.
Prior to this recent downturn, the LP peer group was experiencing a strong year. It had year-to-date net inflows of approximately $15.5 billion as of the end of Q3 and had net positive flows in 34 out of 35 weeks (which ended the fund-flows week of October 24). The net inflows at the end of Q3 put the group on pace for the second highest annual net inflows in its history, trailing only the +$62.9 billion of 2013. Investor demand for LP funds, or bank loan funds, is fueled by rising interest rates. This is due to the loans having floating interest rates—therefore, as the Federal Reserve raises interest rates, the yield on LP funds goes up as well. As the Fed gave indications that it would be slowing down its rate hike program, investors started to pull money out of bank loan funds. While the Fed did raise rates another 25 basis points at its meeting this week, it also reduced its forecast for rate increases in 2019 down to two from three. The Fed also adjusted its forward guidance language, which seemed to indicate that the tightening cycle is coming to an end. Therefore, the recent exodus from the LP peer group appears to be the result of the sector being overbought in addition to the Fed turning off the interest rate increases.
The most significant net outflows over the last two weeks at the fund level belong to the Lord Abbett Floating Rate Fund (LFRAX, -$980 million), Oppenheimer Senior Floating Rate Fund (OOSAX, -$530 million) and SPDR Blackstone/GSO Senior Loan ETF (SRLN, -$524 million).
Loan Participation Funds’ (including both mutual funds and ETFs) Weekly Net Flows ($Bil), November 21, 2018, Through December 19, 2018
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