Marketfield Fund (MFLDX), July 2012

Objective

The fund pursues capital appreciation by investing in a changing array of asset classes.  They use a macroeconomic strategy focused on broad trends and execute the strategy by purchasing baskets of securities, often through ETFs.  They can have 50% of the portfolio invested in short sales, 50% in various forms of derivatives, 50% international, 35% in emerging market stocks, and 30% in junk bonds.

Adviser

Marketfield Asset Management, LLC.  Marketfield is a registered investment advisor that offers portfolio management to a handful of private and institutional clients. The firm is an absolute return manager that attempts “to provide returns on capital substantially in excess of the risk free rate rather than matching any particular index or external benchmark.” They have $2 billion in assets under management in MFLDX and a hedge fund and a staff of 13.  They’re currently owned by Oscar Gruss & Son Incorporated but were sold to New York Life in June 2012.

Manager

Michael C. Aronstein is the portfolio manager, president and CEO. He’s managed the fund since its inception in 2007. He’s been the chief investment strategist of Oscar Gruss & Son since 2004. From 2000 to 2004, he held the same title at the Preservation Group, an independent research firm. He has prior portfolio management experience at Comstock Partners, where he served as president from 1986 to 1993. He was also responsible for investment decisions as president of West Course Capital between 1993 and 1996. Mr. Aronstein holds a B.A. from Yale University and has accumulated over 30 years of investment experience.

Management’s Stake in the Fund

As of 12/31/2011, Mr. Aronstein had $500,001 – $1,000,000 in the fund. As of December 31, 2011, no Trustee or officer of the Trust  owned shares of the Fund or any other funds in the Trust.

Opening date

July 31, 2007.

Minimum investment

The minimum initial investment is $2,500 for all accounts.  The subsequent investment minimum is $100.

Expense ratio

2.47% on assets of $2 billion.  That includes about 87 basis points of expenses related to interest and dividend payments on securities sold short. There’s a 1% redemption fee for shares held 60 days or less.

Comments

A great deal of the decision to invest in Marketfield comes down to an almost religious faith in the manager’s ability to see what others miss or to exploit opportunities that they don’t have the nerve or mandate to pursue.  Mr. Aronstein “considers various factors” and “focuses on broad trends” then allocates the portfolio to assets “in proportions consistent with the Adviser’s evaluation of their expected risks and returns.”  Those allocations can include both hedging market exposure through shorts and hyping that exposure through leverage.
Mr. Aronstein’s writings have a consistently Ron Paul ring to them:

The current environment of non-stop fiscal crises is part of a long, secular reckoning between governments and free markets.  This is and will continue to be the dominant theme of this decade. The various forms of resolution to this fundamental conflict will be primary determinants of economic prospects for the next several generations.  In some sense, we are at a decision point of similar moment as was the case in the aftermath of World War II.

The expansion of government power is “an ill-conceived deception.  Placing the blame [for economic dislocations] on markets and economic freedom becomes the next resort.  This is the stage we are now entering.”  He expects the summer months to be dominated by “somber rhetoric about the tyranny of markets” (Shareholder Letter, 31 May 2012).  He is at least as skeptical of the governments in emerging markets (which he sees as often “ordering major industries to maintain unprofitable production, increase hiring, turn over most foreign exchange receipts, buy only from local supplies and support the current political leadership”) as in debased Europe.

The manager acts on those insights by establishing long or short positions, mostly through baskets of stocks.  As of its latest shareholder report (May 2012), the fund has long positions in U.S. firms which derive their earnings primarily in the U.S. market (home builders, regional banks, transportation companies and retailers).  It’s shorting “emerging markets and companies that are expected to derive much of their growth from strength in their economies.”   The most recent portfolio report (30 March 2012) reveals short positions against an array of individual emerging markets (China, Australia, Brazil, South Africa, Malaysia plus individual Spanish banks).  With an average turnover rate of 125% per year, the average position lasts nine months.

The fund’s returns have been outstanding.  Absolute returns (15% per year over the past three years), relative returns (frequently top decile among long-short funds) and risk-adjusted returns (a five-star rating from Morningstar and 1.24 Sharpe ratio) are all excellent.

This strategy is similar to that pursued by many of the so-called “global macro” hedge funds.  In Marketfield’s defense, those strategies have produced enviable long-term results.  Joseph Nicholas’s “Introduction to Global Macro Hedge Funds” (Inside the House of Money, 2006) reports:

From January 1990 to December 2005, global macro hedge funds have posted an average annualized return of 15.62 percent, with an annualized standard deviation of 8.25 percent. Macro funds returned over 500 basis points more than the return generated by the S&P 500 index for the same period with more than 600 basis points less volatility. Global macro hedge funds also exhibit a low correlation to the general equity market. Since 1990, macro funds have returned a positive performance in 15 out of 16 years, with only 1994 posting a loss of 4.31 percent.

Bottom Line

Other high-conviction, macro-level investors (c.f., Ken Heebner) have found themselves recognized as absolute geniuses and visionaries, right up to the moment when they’re recognized as absolute idiots and dinosaurs.  Commentators (including two surprisingly fawning pieces from Morningstar) celebrate Mr. Aronstein’s genius.  Few even discuss the fact that the fund has above average volatility, that its risk controls are unexplained, or that Mr. Aronstein’s apparently-passionate macroeconomic opinions might yet distort his judgment.  Or not.  A lot comes down to faith.

Of equal concern is the fund’s recently announced sale to New York Life, where it will join the MainStay line of funds.  The fund will almost-certainly gain a 5.5% sales load in October 2012 and MainStay’s sales force will promote the fund with vigor.  Assets have already grown twenty-fold in three years (from under $100 million at the end of 2009 to $2 billion in mid-2012).  It will certainly grow larger with an active sales force.   Absent a commitment to close the fund at a predetermined size (“when the board determines it’s in the best interests of the shareholders” is standard text but utterly meaningless) or evidence of the strategy’s capacity (that is, the amount of assets it can accommodate without losing the ability to execute its strategy), this sale should raise a cautionary flag.

Fund website

Marketfield Fund, though mostly it’s just a long list of links to fund documents including Josh Charney’s two enthusiastic Morningstar pieces.

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact [email protected]
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