A brand-new award for some experienced alternative mutual fund managers.
This year, for the very first time, we are nominating three managers for our new Morningstar Alternatives Fund Manager of the Year award. Morningstar began distributing Fund Manager of the Year awards in 1987, first to a single stock or bond manager, and then, starting in 1995, across the domestic-stock, international-stock, and fixed-income categories. Selecting Fund Manager of the Year nominees is a year-long process, and we seldom nominate managers operating in narrow segments of the market (sector funds, for example).
So, it’s notable that, 25 years later, our Fund Manager of the Year awards are considering a broader range of managers who don’t fit any standard investment bucket. Morningstar defines alternative investments as those that do not fit neatly in our traditional equity or fixed-income style boxes--either because they invest in different asset classes, take long and short positions, or because they are illiquid. Just a few years ago, one could gain access to alternative investments only via private vehicles with high minimum investments and strict redemption terms. Now these same strategies, such as long-short equity, market-neutral/arbitrage, or managed futures, are widely available in exchange-traded funds and mutual funds, with low minimum investments and daily liquidity.
There are currently 361 alternative mutual funds (as of Dec. 17) across several different categories. Almost 60% of these funds launched post-2008, and the total assets in all 361 alternative funds constitute less than 2% of the entire fund universe. Nevertheless, these investments are increasing in importance as advisors look to them to reduce and diversify the risk in their traditional stock and bond portfolios. (See our annual Morningstar Barron’s survey.)
What our new Fund Manager of the Year award means, then, is that alternative investments, particularly those in liquid vehicles such as mutual funds and ETFs, are here to stay. Here are three alternative mutual fund management teams we’d like to recognize as the cream of crop for 2012.
Michael Aronstein From MainStay Marketfield MFLDX
Year-To-Date Return through Dec. 16: 11.6%
Category Rank (Percentile): 11
Manager Michael Aronstein--who served as manager of global investment strategy for Merrill Lynch in the 1980s, president of Comstock Partners (an RIA) in the late 1990s, and chief investment strategist for Oscar Gruss & Son in the 2000s--launched this macroeconomic-themed long-short equity mutual fund in 2007. The fund has earned a 5-star Morningstar Rating over the past three and five years, as well as a Bronze Morningstar Analyst Rating. (Morningstar launched qualitative analyst ratings on 40 alternative mutual funds in June 2012, and 40 more will debut in early 2013, covering 85% of alternative mutual fund assets).
Unlike most funds in the long-short category, this fund weathered the entire 2007-09 financial crisis (only 29 of the category’s 83 funds were around prior to 2008). From early 2007 through early March 2009, the fund lost 22.8%, relative to the S&P 500’s 50% dive, by shorting financial and emerging-markets stocks early on. Then Aronstein invested in cyclical stocks and shorted long-dated Treasury ETFs in 2009 and 2010, benefiting from the stock market’s recovery. More recently, in 2012, Aronstein made money for investors in the second quarter by shorting emerging-markets stocks (iShares JPMorgan USD Emerging Markets Bond EMB and Baidu Inc. BIDU, for example). Through Dec. 16, the fund has outperformed the S&P 500 on a risk-adjusted basis (using annualized daily Sharpe ratio) and ranks 11 and 14 out of 83 funds in the category in terms of absolute (11.6%) and risk-adjusted returns, respectively. The fund’s success has attracted significant assets, and it is now the second-largest fund in the long-short category ($3.8 billion as of Nov. 30).
Effective October 2012, the fund was adopted by MainStay Investments, which is now the advisor to the fund. Since then, the fees have gone up for this once no-load, no 12b-1 fee fund. Aronstein and Marketfield remain the subadvisor, however, so its prospects still look good.
Team From Calamos Market Neutral Income CVSIX
Year-To-Date Return through Dec. 16: 5.6%
Category Rank (Percentile): 5
This year we are nominating two funds from the market-neutral category. Both are team-managed, and both are closed to investors, but that’s where the similarities end. Calamos Market Neutral Income allocates about 50% of its capital to a convertible arbitrage strategy and 50% to a covered call-writing stock strategy that is hedged with index put options. This fund has been around for more than 20 years (although prior to 2006, the strategy was included only the convertible arbitrage component), and it boasts a 4-star three-, five-, and 10-year Morningstar Rating. Morningstar’s analysts have awarded it a Bronze Morningstar Analyst Rating.