The value of assets under management at US loan funds dropped by the most in six months in March, as the banking turmoil sent secondary markets tumbling and intensified withdrawals from the asset class.
Data from Morningstar fund flows and LCD show loan holdings at ETFs and mutual funds fell by $6.3 billion last month, the most since September 2022. This brings the total decline to $50 billion since volatility gripped global risk markets in May 2022.
Amid outflows and falling prices, the total net asset value of money market funds fell to $106.7 billion, the lowest since April 2021. As a result, prime funds now represent just an 8% market share of outstanding loan obligations in the Morningstar LSTA US Leveraged Loan Index, down from 11% a year ago. At their peak in 2014, retail funds represented nearly a quarter of the loan index.
With rolling bank stresses sending investors to safe-haven assets, the pace of withdrawals from leveraged loans intensified as nearly $6 billion left the asset class in March, the most in six months, and the eleventh consecutive monthly outflow.
In addition to the heady pace of withdrawals, falling secondary prices also contributed to March’s AUM decline (though to a lesser extent). The weighted average bid for loans in the Morningstar LSTA US Leveraged Loan Index fell 77 bps, the worst showing in six months, though there were three steeper market selloffs in the six months prior: in May 2022, prices fell 2.84 points, in June 2022 they fell by 2.48 points, and in September 2022, they shed 2.64 points.
Meanwhile, with March’s $16.5 billion outflow, per Morningstar, US equity funds have lost assets in five consecutive months. Long government bonds led all Morningstar categories with nearly $17 billion in first-quarter inflows.
Looking ahead, against a backdrop of relentless investor outflows from leveraged loans, and renewed volatility, LCD gauged market professionals’ expectations for retail demand for leveraged loans in its quarterly Leveraged Finance Survey. The results show that 38% believe outflows will accelerate, and 36% said outflows would moderate. This opinion reflects expectations that a majority of respondents to the polling, which concluded March 22, also expect volatility to worsen.
Featured image by Lerbank-bbk22/Shutterstock
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