the Mainstay Marketfield fund (ii)

I’ve been thinking about the Mainstay Marketfield fund. The I shares (the ones with the longest track record) = MFLDX.

Is this a risky fund?

A lot depends on what you mean by “risky.”  And a lot depends on the time frame you use.

The standard academic way of assessing risk is to equate it with the short-term volatility of returns.  The idea has some initial plausibility.  All other things being equal, and for everyone besides roller coaster junkies, a smooth ride is better than a bumpy one.  Greater assurance that the price tomorrow isn’t going to deviate much from the price today sounds good, as well.

The main virtue of risk-as-volatility, though, is that it’s easily quantifiable and the data for measuring it are readily available.  There’s no need to delve into the actual investments and make potentially messy judgments about what a security/portfolio is and how it works, either.

On this way of looking at things, MFLDX isn’t risky at all.

During late 2008 – early 2009 the fund declined less than the S&P 500.  From the beginning of the bull market in March 2009 until mid-2013 it tracked the S&P relatively closely.  Less volatile in down markets, average volatility in up markets.  Not a bad combination–if this is all risk is.

Regular readers will know that I’m not a fan of this academic orthodoxy–which is, by the way, also universally accepted by the consultants who advise institutional pension plans.  It isn’t only that you don’t need any practical knowledge of the products you’re assessing–just a computer and a data feed.  Nor is it that my portfolios routinely had part of their excess returns explained away by their greater-then-average volatility.  No, it’s that, in my view, for an investor with a three-, five- or ten-year investment horizon whether a security goes up/down a little more or a little less than the market today and tomorrow has very little relevance.

Risk-as-volatility has done serious damage in financial markets in the past.  For years, academics and consultants regarded junk bonds as relatively safe because their volatility was close to zero.  They didn’t realize that the prices never moved  because the securities were highly illiquid and seldom traded.  In fact, during the 1990s, i.e., even after the junk bond collapse of the late 1980s, Morningstar continue to have junk bond funds in the same category as money market funds.  Since NAVs never moved, the former got all the highest ratings.

Back to MFLDX.

Suppose we look at the fund in a commonsense way.

Marketfield’s website portrays ithe firm as consisting of three principals who concentrate on macroeconomics.  The career descriptions indicate that only the director of research, who arrived in 2011, had any prior portfolio management experience.

The group runs a highly sectorally concentrated portfolio.  MFLDX can be both long and short.  It has a global reach.  It can own/sell short stocks, bonds, currencies, sectors, indices.

Despite having all these potentially return-enhancing weapons at its disposal, the fund was unable to outpace an S&P 500 index fund during the first four years of the bull market.

Yes, short-term price fluctuations were not extreme.  And I’m not saying that one could have predicted that MFLDX would be down 12% in 2014, in a market that is up 13%–sparking massive redemptions.  But it seems to me that risk-as-volatility didn’t come anywhere near to capturing the risk elements present in this fund.




2 responses

  1. In looking at this hedge fund, I review one that I am in bond wise. It was small, less than $10M and returned a whopping 54% in 9 months of 2008, 38% in 2009, 26% in 2010, and then mediocre from then to now. It still has about $200M+ (I don’t know the exact value) in bonds valued at zero, in receivership, or otherwise not valued in the portfolio – if they payoff at all, I have a very good payday. So is this hedge fund risky? Even on a bad year it returns close to 10%.

    Then there is the Private Client portfolio which weighs in with 35%+ in international stocks, funds, etc. that has returns only 2% since August – looking at it, the international component has lost about 15%, so the domestic component really has had a great year. Thus, your premise that this isn’t a risky fund at all – I agree.

    People need to understand the definition of ‘hedge’, which the general public does not. Thank you for your contributions / articles. As always, love the insight…

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