High Yield Bond fund flows know the flows

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Justin Doyle
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1 NYSSA High Yield Bond Conference, June 2011 High Yield Bond fund flows know the flows Investors have poured money into high-yield bond funds at a record pace this year as they seek less-risky alternatives to the volatile stock market while getting better returns than those of other fixed-income securities. The Street.com June 15 th 2011

2 High Yield fund flows from EPFR Global Company Profile EPFR Global provides fund flows and asset allocation data to financial institutions around the world. Tracking both traditional and alternative funds domiciled globally with $15 trillion in total assets, EPFR Global delivers a complete picture of institutional and retail investor flows and fund manager allocations driving global markets. Cumulative Weekly Flows to High Yield Bond Funds by Geographic Region Our market moving data services include daily, weekly and monthly equity and bond fund flows, manager allocations by country and sector, and overall country flows. The data is sourced from: Funds registered in all of the world s major domiciles Direct relationships with fund managers and administrators Historical time-series Fund Flows By Fixed Income Asset Class High Yield is the second best Fixed Income asset class YTD when it comes to attracting fresh money. Last year s winners, Total Return Funds, are lagging so far this year. Intermediate Term-Bond-Flow Cum Short Term Bond-Bond-Flow Cum Intermediate Government-Bond-Flow Cum Short Term Government-Bond-Flow Cum All Emerging Markets-Bond-Flow Cum Total Return-Bond-Flow Cum Inflation Protected-Bond-Flow Cum Floating Rate-Bond-Flow Cum Mortgage Backed-Bond-Flow Cum Municipal Bond-Bond-Flow Cum Long Term Bond-Bond-Flow Cum Key differentiators Unmatched Quality EPFR Global reports actual flows, and does not do any proxying or extrapolation, making EPFR the most accurate and reliable source available. Our data team employs a high-touch Quality Assurance process with multiple checks to ensure the integrity of the data. EPFR Global benefits from relationships with industry-leading fund managers and administrators. With our daily product, EPFR Global is also the most timely provider of High Yield fund flows. Comprehensive Global Coverage The total EPFR universe covers $15 trillion in internationally domiciled funds of both institutional and retail investors. For High Yield, in addition to US High Yield, EPFR tracks Global High Yield Bond funds and European High Yield Bond funds to provide a complete picture of the sector. Quality Delivery Timeliness and depth Flows are updated daily at 4-4:30pm ET. Back-tested historical data enables clients to accurately track flow behavior during multiple market cycles. In addition to a robust data history, users can track flows at either the aggregate asset class level or individual fund level. Users can track flows by investor type (institutional vs. retail), domicile, and use other filtering tools to better understand investor demand. Banks, brokers, asset managers, and hedge funds use EPFR flows data to help explain market dynamics, investor trends, and as a factor in investment strategy, risk management and asset allocation. Depth Coverage

3 Recent news and research coverage Loan Inflows Hit Record as Investors Seek Protection By Lisa Abramowicz Investors are pouring unprecedented amounts of money into leveraged loan funds as they seek protection from inflation and the potential for a slowing economy. Debt buyers funneled $13.07 billion into U.S. floating-rate mutual funds this year, compared with $11.22 billion of inflows during all of 2010, according to EPFR Global. That s more than the $10.8 billion of inflows into U.S. high-yield bond mutual funds this year, EPFR data show. Junk bond funds attracted $14.1 billion in Investors are turning to loans, anticipating that the Federal Reserve will increase interest rates. They re also seeking the protection of loans in case the number of companies defaulting on their debt gains, according to Jonathan Berger, president and chief investment officer at Stone Tower Capital, which oversees about $26 billion of corporate and structured credit securities. Source: EPFR US Credit Outlook Support from the deep The hidden force supporting asset prices is, of course, the flood of liquidity from the Fed. In his most recent testimony and elsewhere, Bernanke has deemed the fact that equity prices have risen significantly, volatility in the equity market has fallen, [and] corporate bond spreads have narrowed as evidence that the Federal Reserve s recent actions have been effective. Source: Citi Investment Research and Analysis, EPFR By holding interest rates on cash at zero even as the economy has continued to recover, the Fed has left investors scrambling for return wherever they can find it. Much of the rally has been justified by the recovery in the economy, of course. Yet the fall in yields to their lowest levels since the 1960s, the simultaneous rally in gold and recent sell-off in the dollar, leave us thinking that this is about more than just fundamentals. In some ways the fund flows speak louder than the actual market movements: investors have been selling cash assets to buy almost anything else. In 2010, much of this liquidity was making its way into EM; now that investors are growing nervous about political stability, it has again been channeled into US and developed markets (Figure 5). Even IG at 3% starts to look interesting when cash deposits and money market funds are yielding virtually nothing.

4 Using flows to understand investor trends High Yield-Bond-NAV Cum Flows from institutional investors [above] have been much steadier than those from retail investors, [below] suggesting a strategic interest in this asset class from Institutional investors versus a certain degree of return chasing from the Retail Investor High Yield-Bond-NAV Cum

Using flows in the investment process for example measuring risk appetite From the start of the financial crisis until 4Q10 the trajectories for flows into High Yield and Municipal Debt Funds were

Cumulative Weekly Flows to Municipal Bond Funds and High Yield Bond Funds Best call: On May 6th 2010 BofA backtesting indicates that GFSI would have flashed "sell.

5 Using flows in the investment process for example measuring risk appetite From the start of the financial crisis until 4Q10 the trajectories for flows into High Yield and Municipal Debt Funds were broadly similar. Since then flows have suggested investors view municipal debt as riskier than junk bonds. Cumulative Weekly Flows to Municipal Bond Funds and High Yield Bond Funds Best call: On May 6th 2010 BofA backtesting indicates that GFSI would have flashed "sell. Risk assets sold off over the next 30 days, as equities corrected 5.5%, commodities fell 8.1% and HY bonds lost 2.6% Chart 4 shows a backtested chart of the GFSI sell indicator and the performance of major asset classes. The GFSI would have warned of a major correction in risk assets on 6th May Source: BofA Merrill Lynch Global Research, EPFR Global, Bloomberg; indexed to 100 in Oct 09 For more information, please contact: Simon Ringrose ([email protected]) t: x 30 or JC Moos ([email protected]) t:

A leveraged. The Case for Leveraged Loans. Introduction - What is a Leveraged Loan?

A leveraged. The Case for Leveraged Loans. Introduction - What is a Leveraged Loan? PENN Capital Management The Navy Yard Corporate Center 3 Crescent Drive, Suite 400 Philadelphia, PA 19112 Phone: 215-302-1501 www.penncapital.com For more information: Christian Noyes, Senior Managing