Say what you will about the $18 billion MainStay Marketfield Fund (MFLDX), just don't blame the recent poor performance and net outflows on the fund's expansive size.
That's the message consistently being delivered by New York Life Investment Management's MainStay Investments fund family.
“With any fund, it's a fact that after a couple years there will be a natural organic redemption rate,” said Richard Miller, managing director of MainStay Investments.
The fact that the 7-year-old global macro long-short fund swelled to a peak of $21.4 billion in assets in February from $3.3 billion when MainStay absorbed it October 2012 has not hindered the management team's ability to run the portfolio, according to Mr. Miller.
“The fund has a very broad mandate, and the managers are looking at highly liquid securities in highly liquid markets,” he said. “It's a thematic portfolio, and the portfolio managers have several themes that have, at the moment, not been recognized by the broader market.”
Portfolio manager Michael Aronstein, who launched the fund in 2007, was not available for comment. But he has publicly maintained that the portfolio's size, even at three times the size of the next largest fund in the category, is not an issue.
“We more or less got it upside down as far as the last three or four months were concerned; we were short the defensive staple names that did reasonably well this year,” Mr. Aronstein said in June.
(Related: The $20 billion MainStay Marketfield fund's chicken or egg problem)
Last year, while the fund's assets were swelling by $12 billion, it returned 16.9%, beating the Morningstar Inc. long-short fund category average of 14.6%.
But so far this year, the fund has declined by 7.5%, compared with a category average gain of 2%, and investors are taking notice.
The broader alternative mutual fund universe has grown to 465 funds and $161.5 billion, up from 431 funds and $140.8 billion at the start of the year. But even as investors are shoveling money into alternative strategy mutual funds, the Marketfield fund has suffered an asset drain of nearly 16% from the February peak, to $18 billion.
But even with its shrinking asset base, the Marketfield fund is still nearly four times the size of the next-largest fund in the category, the $5.3 billion Robeco Boston Partners Long/Short Fund (BPIRX).
“It's a case of being too big not to fail,” said Bob Rice, managing partner at Tangent Capital.
“This is a classic situation of having a great sales force and a fantastic distribution channel, and it was an easy fund to sell,” he added. “But as a portfolio manager, at some point your edge goes away and you start making macro bets, and it's no longer a matter of beating the market because you are becoming the market.”
The basic hedging style of the long-short fund was never expected to outshine a long-only equity index, particularly in a time of record-level performance. But during the early years leading up to the takeover by MainStay, Mr. Aronstein put together several years of relatively strong performance.
The fund's 2014 performance is the first time it has underperformed its category average. In 2009, when the fund's assets grew from $34 million to $98 million, it generated a 31% gain against a 10.5% category average.
A 14.3% gain in 2010 overshadowed the category's 4.2% gain and in 2011, the fund eked out a 3.7% gain, beating the category's 2.8% decline.
Perhaps the best example of where the strategy was doing what it is designed to do was during the market carnage of 2008, when its 12.9% decline stacked up against a category average decline of 15.4%, and a 37% decline by the S&P 500.
In fact, the fund outperformed the S&P during three of its first four full years in operation.
Those kinds of data points likely helped the New York Life/MainStay sales force talk up the fund to financial advisers and investors as a golden hedging strategy in good times and bad, and helped propel the fund to become a kind of poster child of alternative strategies.
Morningstar analyst Josh Charney has continued to side with MainStay that the fund's size is not the issue, and insists it is simply a matter of an out-of-favor strategy that has missed some big calls.
“I don't think it's necessarily a size issue, because it has always been predominantly global macro and they can largely execute positions through ETFs,” he said. “It's the process that's the issue, and at this point it's just not working.”
As thematic strategies go, there is no denying the fund's track record, which included shorting homebuilders, mortgage-related stocks and financials at the end of 2007. In early 2009, the fund covered its financial shorts and went long the sector just as the market was taking off.
The fund also made the timely calls of shorting gold and emerging markets in 2012.
But that was then, and investors have little patience for hot funds that start to falter, as is currently being played out in the fund's outflows.
“Unfortunately, flows are coupled with returns, and it's a shame to see that because investors are focused on performance,” said Mr. Charney. “It's a good lesson not to follow hot funds, but my prediction is that investors probably aren't going to get the timing right on getting out or getting back in.”
