Assets under management at U.S. funds investing in leveraged loans dipped to $88.48 billion in the October reading, the lowest reading since the mass retail exodus from risk assets in March. For reference, the measure in March, at $87.89 billion, just $590 million less, marked the lowest reading since October 2012. October’s decrease is consistent with a long-standing decline in demand for floating-rate loans amid low rates and, more notably of late, investors favoring the high-yield asset class.
While negative, with investors largely on the sidelines ahead of the U.S. presidential election, October’s roughly $460 million decline, as measured by Lipper fund flows and LCD data, compares favorably to a nearly $4 billion average monthly contraction over the past 24 months, and pales in comparison to the seismic $29.11 billion drop in March that, as the above chart illustrates, sent the total net asset value of U.S. prime funds investing in loans over a cliff.
In the four weeks ended Oct. 28, roughly $250 million exited exchange traded and mutual funds, putting total withdrawals in 2020 at $19.18 billion through Oct. 28, according to Lipper weekly reporters. This comes after $27.73 billion of withdrawals in full-year 2019 — a trend that closely followed rates as investors watched coupons drift ever lower.
For the full month of October, LCD estimates $358 million of outflows from retail loan funds, which was met with a change in market value of negative $100 million.
With investors shunning leveraged loans for high-yield in recent months — thanks in part to support for the fixed-rated asset class from the Fed — U.S. retail funds investing in high-yield bonds had nearly $38.21 billion in net cash inflows through Nov. 11 in 2020, putting assets at these funds at $271.77 billion, according to Lipper.
But with the value proposition for the high-yield asset class lessening (the average yield-to-worst per the S&P U.S. High Yield Bond Index plumbed 6.5-year tights of 4.46% on Nov. 9), retail demand for leveraged loans could finally improve from the relentless two-year run of outflows.
Sentiment has clearly improved in the leveraged loan market (the average secondary bid of the S&P/LSTA Leveraged Loan Index jumped 1.55 points, to 94.72 on Nov. 18, from where it started the month), though investor concerns about the rising coronavirus cases and subsequent restrictions could overshadow recent optimism around a potential economic recovery from successful vaccination developments.
Nevertheless, leveraged loans of course are always at the behest of rates. To that end, Fed officials, leaving target interest rates unchanged on Nov. 5 at a 0% to 0.25% range, signaled the near-zero interest rate policy could remain in place until 2023.