Mutual funds that both buy stocks long and sell stocks short have been attracting inflows. Indeed, the Morningstar long/short equity fund category has seen total assets rise from $19 billion in December 2011 to more than $26 billion in December 2012. Josh Charney, an alternative investments analyst at Morningstar, sees this trend continuing.
“Part of the appeal is that long/short funds are easier to understand than other alternative strategies because it is equity based,” he says, adding that investors also like the protection these funds can offer by shorting and losing less in a market decline.
The funds in the long/short space are more differentiated than most equity strategy categories. “These funds pursue different strategies, have different net exposures and betas, and are very different from one another,” Charney says. “By contrast, large-cap value managers all have similar criteria for stock selection. But long/short managers are all over the map.”
This diversity is reflected in the approaches of Morningstar’s top-rated funds. The MainStay Marketfield fund (MFLDX) uses a global asset allocation strategy, based largely on the macroeconomic viewpoint of manager Michael Aronstein, whose stewardship has delivered a 11.77 percent return over the past year (through April 25) and 7.40 percent over the past three years, easily besting the category average of 6.09% and 3.91 percent, respectively. The fund’s expense ratio is 1.53 percent.
Morningstar rates this fund five stars based on historical risk-adjusted returns, and awards the fund a “bronze” medal based on a subjective evaluation of the fund by the analyst.
Another solid fund in the long/short category, the Robeco Boston Partners Long/Short Research fund (BPRRX), takes a bottoms up approach to buying and selling stocks based on valuation targets.
The fund, which was launched in 2010 after Robeco closed its original long/short fund to new investors, has returned 9.8 percent over the past year. The fund’s expense ratio is 1.79 percent.
Charney has a positive view on the fund based on its short-term track record, as well as on the firm’s historical results and its strong investment process.
“Robeco’s fund is another compelling opportunity,” he says. “Robeco has a strong but volatile value-add from the short side, adding two percent annually for the last 10 years.” Morningstar awarded the fund a bronze medal.
Style Drift