Morningstar Magazine - June/July 2017 - 79

The Marketfield Saga
Why this prominent fund's struggles
don't doom the category.

INVESTMENT RESEARCH: ALTERNATIVES

Josh Charlson

In May 2014, I wrote an article called "A Red Giant
Engulfs the Long-Short Category." The red
giant in question was the MainStay Marketfield
fund, whose "supernovalike asset growth"
had resulted in $13.4 billion in new assets in 2013
and a peak of more than $20 billion in assets
under management, up from a mere $35 million
in assets at the end of 2008.
Over the past two and a half years, things have
changed radically for the erstwhile liquid
alternatives poster child. To put it mildly, the red
giant has run into a serious gravitational force.
Performance first hit some rough spots in early
2014 (noted in my article at the time) and
has kept running south since then. Marketfield's
trailing three-year return through Dec. 31,
of negative 8.06% annualized (I shares), ranks
in the bottom of the long-short equity Morningstar
Category. Assets gushed out at an astonishing
rate, with the fund ending 2016 with $613
million in assets under management, a fraction
of its peak size ( E X H I B I T 1 ).
In April 2016, Marketfield Asset Management
reacquired the fund from New York Life (the parent
to MainStay Funds), added CEO Michael
Shaoul as a named portfolio manager alongside
since-inception manager Michael Aronstein,
and set about the work of restoring the fund's
performance and reputation.
Clearly, serious investing mistakes were made at
Marketfield. Equally apparent, MainStay made some
egregious missteps in the marketing of the fund.

Less clear to me is the claim that, as many in the
media would have it, the problems at
Marketfield stand in miniature for the problems
experienced in the liquid alts industry at large.
That's a convenient narrative for those seeking
attention-grabbing headlines, but it's not a
helpful diagnosis of what ails either Marketfield
or liquid alternative funds.
A Brief History of a Rise and Fall
Marketfield MFLDX, while classified as a long-short
equity fund by Morningstar, also shares
characteristics of global macro funds. The fund
allocates long and short globally based on themes
generated through the macroeconomic
research and views of Aronstein and his team,
largely implemented via individual securities (and
occasionally baskets of securities or exchangetraded funds).

Marketfield established its reputation in the
2008-09 period, when the fund lost only
12.88% in 2008 (Aronstein shorted many financials)
but pivoted adroitly to earn 31.08% in 2009, thus
achieving the rare feat of beating the
S&P 500 in both years. Aronstein and company
continued to hit the right notes in 2010 and
2011, keeping pace with the index and crushing
long-short equity peers. Even after that
stretch of success, however, the fund was still
relatively small, shy of $1 billion at the end
of 2011, with growth coming mainly via
word of mouth, as the firm made little effort
to market the fund.
It was only after MainStay acquired the fund
in 2012, taking over distribution duties
while Marketfield Asset Management remained
as subadvisor, that the fund's asset growth
really took off. There was a great performance

track record to sell, and clearly advisors sold
it-in spades. MainStay, looking to get a foothold
in the fast-expanding liquid alternatives space,
caught hold of a rocket ship. There's no
direct evidence that the massive inflows had a role
in the fund's later underperformance, as
Aronstein has generally used large, liquid stocks
and indexes to implement his ideas. It's true
that the fund shifted to a greater international
focus, though Aronstein has said this was a result
of the opportunity set rather than a need to
deploy capital. Still, it's hard to imagine that the
inflows and acclaim didn't at least have an
indirect effect, whether it was the pressure to put
money to work, match past success, or simply
meet the burdens on time from advisors, investors,
and the press.
But what were they selling, exactly? It seems that
many investors were seduced by a record
that suggested a fund that could do well in any
kind of market, a sort of uber-hedge fund
in a liquid alternatives wrapper. Even as Aronstein
tried to tamp down expectations, investors kept
pouring in, and as is so often the case with
the habits of mutual fund buyers, they got in only
to miss out on most of the gains the fund had
accrued, but were in time for a stretch of
underperformance that started in 2014. Over the
five years from July 1, 2011, through June 30,
2016, the fund's annualized total return was barely
positive at 0.36%, while its investor return was
negative 2.37% annualized (based on quarterly
data because of data limitations). In contrast,
from its August 2007 inception through June 30,
2011, the fund returned 8.5% annualized compared
with negative 0.27% annualized for the S&P 500
during that period.
Morningstar analysts also weighed in favorably on
Marketfield. We gave the fund a Morningstar
Analyst Rating of Bronze when we first initiated
coverage and maintained that rating until
November 2014, still relatively early in the fund's
downturn. Our positive rating was never tied
purely to performance, however, but to what
we saw as a proven, data-driven macroeconomic
process that emphasized diversification across
its bets. Even from our first analyses of the fund,
though, we called out the risks of a strategy
based on market-timing and largely driven by the

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