Morningstar Magazine - June/July 2017 - 80

Strategies

EXHIBIT 1

Piling in Before the Dive Investors poured assets into Marketfield Fund immediately
before its performance began a long decline.
Cumulative Net Inflow

Growth of $10K

30M
$

20K
$

25

18

20

16
14.5

15

14

10

12

5
0

10
8
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Morningstar. Data as of 12/31/2016.

views of a single manager. When we downgraded
the fund, our concerns focused on the fact that
Aronstein's bets had become much more highly
correlated, whether from a perceived lack of
opportunity or an unconscious narrowness of focus
in his view of markets.
Even though we were relatively early in
downgrading the fund, in retrospect it appears
that we could have been even more diligent
in identifying the actualization of risks that we had
noted from a more hypothetical perspective.
In a larger sense, the shifts in Morningstar's
assessment of Marketfield reflect the difficulties
of evaluating macro-oriented strategies,
not only because of the challenges of markettiming and concentration, but because the
allocations may change so swiftly that a fund's
current portfolio may look completely different
12 months later.
A Certain Brand of Active
Yet to try to turn Marketfield's struggles into an
indictment of alternative funds as a whole
is to miss the point. Marketfield's woes, at least
from an investment perspective, are more
indicative of the problems of a certain brand of
active management. Yes, Aronstein uses shorting
in the fund, but not to hedge so much as to
generate alpha by taking active stances against

80

Morningstar June/July 2017

companies or industries. He has a proclivity for
making concentrated thematic bets, and it was
his degree of conviction and the overlapping
of positions dependent on a resurgence in global
inflation that got the fund wrong-footed. This is
a pattern-a stretch of great performance
followed by a high-conviction bet gone seriously
awry that torpedoes both performance and
assets-that we've seen historically from active
fund managers such as Legg Mason's Bill
Miller, Fairholme's Bruce Berkowitz, and more
recently the skippers of Sequoia Fund SEQUX.
As Morningstar's John Rekenthaler has argued,
these types of strategies are ever more rare
in a mutual fund industry increasingly leaning
passive and risk-aware.
It's true that liquid alternative mutual funds
have disappointed, but they constitute too broad
and diverse a group to ascribe a single cause
to their ailments. To the extent such funds have
struggled, however, in most cases it's not
due to excessive risk-taking or large, misaligned
bets (though certainly funds other than
Marketfield have been guilty of this). Rather, many
managers have been overly hedged, believing
that equity markets were overvalued and
bond markets were due for an interest-rate rise,
while high fees have cut into their modest
expected-return positioning.

The one area where painting with the liquid alts
brush rings true is in the marketing and sales
approach to Marketfield. We don't know exactly
what MainStay's sales pitch was for the fund,
but it seems safe to assume that many investors
were not fully cognizant of the fund's risks
and probably had little idea of the fund's exact
investment approach. When investors are being
sold on a concept (whether it's liquid alts,
smart beta, or any other trend of the moment)
rather than a specific investment, bad things
are likely to happen. Alternatives have their place
in investors' portfolios, but it's incumbent on
fund companies to responsibly educate advisors
and investors on how to use them and what
their risks are.
Options on the Table for Investors
For investors who still have money in the fund, the
key questions are whether to stay put and what
they can expect going forward.

Our Analyst Rating of Neutral suggests that
the fund is likely to earn only categorylike returns
over the long term. But those returns are likely
to come in very lumpy fashion. Investors should be
prepared to ride out long stretches when
the fund's high-conviction bets are out of favor.
Considering the rough period the fund has
endured the past three years, now might not be
the wisest time to sell shares. (Indeed, the
fund was up 5.56% for the year to date through
April 30, in the top third of the long-short equity
category, as the fund's reflationary theme
finally seemed to be finding favor in the market.)
Eventually the fund should find its footing, and
after a period in which Aronstein seemed
to have little in the way of new investment ideas,
more recently he has found several encouraging
themes, such as shorting asset-management
firms that he believes will be affected by pressures
on profit margins. But investors who are
uncomfortable with the levels of uncertainty and
concentration here might well consider seeking
out more-traditional and predictable offerings. K
Josh Charlson, CFA, is director, manager selection, with
Morningstar Research Services.



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