Net fund outflows a blip not a trend, says Goldman

Analysis of high yield mutual fund flows suggests that the recent outflows will likely be transitory, says Goldman Sachs in latest ‘Credit Line’ research. Historical record suggests that high yield fund flows are highly sensitive to shifts in risk sentiment, with a strong correlation between inflows and lagged equity returns.

Given the drop to 1068 from 1138 in the S&P 500 index from 20 January to 10 February, models would have predicted average outflows of 0.49% of assets under management, or $460 million per week - close to the actual average weekly outflows of $479 million, say analysts. This result suggests that the recent outflow is less concerning than it initially appears.

Secondly, the evidence on mutual fund flows over the phase of the business cycle suggests that sustained net outflows from high yield mutual funds are a late-expansion phenomenon. Sustained outflows never happened during the early stage of expansion, which fits historical association of early-phase expansions with improving credit quality and declining high yield default rates.

Goldman adds that most trading in high yield ETFs tends to be institutional. Outflows from non-ETF mutual funds may also partly reflect portfolio rebalancing of institutionally managed private wealth assets. Now that risk sentiment appears to have stabilised, analysts expect mutual fund flows to high yield to resume.