Mainstay Marketfield (iii): dollars and sense

the Mainstay/Marketfield deal

When the Marketfield fund sold itself to Mainstay in mid-2012, it got two things:

–the legitimation of being part of a large financial company, New York Life; and, more important,

–it got access to NYL’s powerful distribution capabilities.

NYL, in turn, obtained a new “hot” product, with $2 billion under management, a respectable (if short) track record and a five-star Morningstar rating (btw, according to the Financial Times, Morningstar is now calling the fund a “gateway drug.”  It has also taken away two of the fund’s stars.).

terms?

I don’t know.  I imagine it consisted of an upfront cash payment to Marketfield, plus a continuing share of the management fee, which is 1.40% for the first $7.5 billion of assets, declining to 1.36% for assets over $15 billion.   Doubtless, Marketfield can’t create a competing product.

the product launch

I haven’t seen them, either.  I would imagine, though, that the sales pitch would be some version of the free lunch idea–that you get all the upside of an index fund plus considerable downside protection in bad times from the portfolio managers’ ability to sell short

the fund economics

Mainstay Marketfield is a load fund, meaning investors typically pay a sales charge to get their money into it.  The rules for how the charge is assessed are complicated.  Basically, though, if you have at least $1 million in assets in the Mainstay fund complex after your purchase, you get in for free. If you have $500,000+, the charge is 2% of your investment;  below $250,000 it’s 3.5%; below $50,000, it’s 5.5%.

In 2013, Mainstay Marketfield took in $13 billion+ in new money, according to the FT.  Let’s say that the average sales charge was 2% (my experience working for a load fund complex suggests the real figure is more like double that, but there may have been sales to large institutions, and anyway let’s be conservative).  If so, that total for the year would be $260 million in sales charges.  Roughly half would be paid to the selling brokers, meaning NYL netted $130 million.

Let’s say average assets under management for 1013 were around $10 billion.  A 1.39% management fee would amount to another $140 million, of which some part, let’s say 25%, would go to Marketfield.  That would leave $105 million for Mainstay.  (More complications:  Total fund expenses, including management, 12b1 fees and short-selling expenses, are around 3% annually.  To aid its sales efforts, Mainstay placed a short-term cap on expenses.  I’m not sure what expenses are included under that cap or how the costs may be shared with Marketfield.  So I’m noting, but ignoring, this.)

Let’s do what securities analysts always do.  My sales charge figures is probably too low; my management fee figure is probably too high.  We’ll cross our fingers and hope the two errors cancel each other out.  If so, Mainstay netted a cool $235 million from owning Marketfield in 2013.  Marketfield took in $35 million as well.

2014 and beyond?

2014 will likely prove to be a very profitable year, something along the lines of 2013, despite the fund’s recent woes.  Remember, average assets for the year will probably be around $15 billion–meaning management fees would have been 50% higher than in 2013.  And there were likely at least some sales in the first half.

I think a lot depends on whether the PMs can stabilize the fund’s performance, and thereby put a halt to redemptions.

If so, the fund may end up with, say, $7 billion in assets–and generate $100 million in yearly management fees.

If not, my guess is that Mainstay will try to sell the fund back to Marketfield or, as mutual fund complexes often do, fold it into another fund concept and have the Marketfield name disappear from the Mainstay stable that way.

It’s pretty clear what needs to be done.  The big question is whether the PMs have the willingness.

 

 

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