January 12, 2018

Investment-Grade Corporate Debt Funds Continue to Prosper

by Patrick Keon.

After capturing near-record-setting annual net inflows in 2017 (+$164.8 billion) the Thomson Reuters Lipper investment-grade corporate debt funds macro-group took in $3.0 billion of net new money for the fund-flows trading week ended Wednesday, January 10, 2018, marking the thirty-second consecutive weekly net inflows for the group and its largest since the fund-flows week ended March 27, 2017 (+$3.7 billion). The investment-grade corporate debt funds macro-group had net inflows for 57 of the last 58 weeks.

The group thrived in 2017, taking in its second largest ever annual positive net flows, trailing only the $171.8 billion of net inflows for 2009. Investment-grade corporate debt funds accomplished this feat in an environment in which the Federal Reserve raised interest rates three times during the year and the credit spreads for investment-grade bonds continued to tighten. The BofA Merrill Lynch US Corporate BBB option-adjusted spread narrowed for eight consecutive quarters to close 2017 at 1.28%, the smaller the spread the more attractive riskier assets are. Despite this prolonged contraction (a total of 113 basis points since its recent high of 2.41% at the end of 2015), investors continued to pump new money into investment-grade corporate debt products.

Three Lipper peer groups dominated the net inflows for 2017: Core Bond Funds (+$83.0 billion), Core Plus Bond Funds (+$26.8 billion), and Ultra-Short Obligation Funds (+$22.0 billion). At the fund level the two largest net inflows went into products in the Core Bond Funds category: Vanguard Total Bond Market II Index Fund (+$30.0 billion) and Vanguard Total Bond Market Index Fund (+$13.4 billion). The largest annual positive net flows for Core Plus Bond Funds belonged to Prudential Total Return Bond Fund (+$9.3 billion). Morgan Stanley Institutional Ultra-Short Income Portfolio (+$5.1 billion) recorded the largest gain in the Ultra-Short Obligation Funds peer group.

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