Assets under management at funds and ETFs investing in U.S. leveraged loans grew by another $3.2 billion in July, the ninth straight monthly increase, totaling $41.1 billion, according to Lipper and LCD.
The recent gain brings total loan fund AUM to $129.5 billion, the most since year-end 2019.
While the $1.27 trillion floating-rate leveraged loan asset class continues to draw interest from institutional investors, there are signs that recent market froth in the segment is settling. The AUM increase in July was the smallest since November. And of note, the market value change of the S&P/LSTA Leveraged Loan Index last month was negative 0.34%, drawing $430 million from overall loan fund AUM. That’s the first negative market value movement since March 2021, and the largest since the COVID-19 shutdown of March 2020, when there was a massive $15.2 billion hit to AUM via market value change.
The easing of AUM momentum comes amid a broader downshift in the asset class in July, as concerns over the rapidly expanding delta variant of the coronavirus deepened. As detailed in LCD’s monthly index/market performance analysis, overall returns on U.S. leveraged loans dipped into the red in July (though barely, at negative 0.01%). That’s down from a 0.37% positive return in June and a 0.76% average monthly performance over the past 12 months.
Despite the negative market value movement on loan fund AUM in July, retail investors continue to bring cash to the asset class, though here too momentum is slowing. Loan funds and ETFs received a roughly $1.25 billion net inflow of investor cash last month, according to Lipper weekly reporters. While that’s the eighth straight monthly inflow, that figure is down from a roughly $2.7 billion inflow in June and the $2.5 billion average over the past three months.
There was even a net redemption during one week in July, of $67 million, the first outflow from the segment since January, according to Lipper weekly reporters. And this more-deliberate pace by investors established last month has carried into August. Inflows over the first two weeks of this month have averaged $276 million, compared to roughly $559 million per week over the previous 12 weeks.
Looking ahead, and more broadly, the factors contributing to a U.S. loan market downshift in July, as well as pressures on Treasury yields, remain. In an outlook dated Aug. 13, S&P Global U.S. Chief Economist Beth Ann Bovino said that consumer spending might weaken from a loss of confidence, amid record-high home and car prices, and due to worries about job security, just as a resurgence in new coronavirus cases makes consumers more cautious about venturing out freely.
Indeed, Bovino writes, a preliminary University of Michigan Consumer Sentiment Index revealed a huge August decline in consumer sentiment, to a 10-year low of 70.2. The uptrend in confidence with vaccination, government checks, and the spring reopening has faded amid the resurgence of the virus, and with it, the return of various restrictions, including mask mandates.