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Thursday, June 5th, 2014
fun with mergers

14 0605 zMERFX

Morningstar recently had a posting/video about the Merger Fund (MERFX), its “Fund Medalist of the Week.”  (The designation means nothing in particular as far as I could tell.  By the way, pause the video so it doesn’t go on to the next feature.)

This is one of those “alternatives,” the analysis of which I discussed in a recent essay (more on that in the first additional item at the bottom).  Unlike most others, however, this fund has been around a long time.  The chart starts at the end of 1989.

I don’t agree with Morningstar that this is a “market-neutral strategy.”  Although it might seem that way, the misses are bigger than someone with that goal in mind should expect.  As you can see in the comment section, investors conceptualize the use of MERFX in a variety of ways.

The chart above shows the relationships to different asset classes in visual form, with each panel showing the relative performance of MERFX:

On top the fund is shown versus the S&P 500, the most questionable comparison, because you wouldn’t expect it to perform in line with that index.  However, nineteen years in, it was substantially ahead of it — but the bull market has left it in the dust since then.

The middle panel shows that MERFX has performed roughly in line with the Barclays Aggregate over the period, although there were sizable moves up and down.  (The backdrop, of course, was a period of steadily declining interest rates.)

At the bottom, the fund is compared to T-bills.  In some sense, that is the bogey — a market-neutral fund should be expected to outperform cash pretty consistently.  Despite the long-run record of doing so, MERFX has had several double-digit drops along the way.

Morningstar’s assessment that a 5.7% loss “can be a worst-case scenario for investors to expect” seems completely off-base — an inappropriate judgment stemming from that number being the worst calendar year to date.  It’s silly to think that’s the worst possible.

If you want to have fun with mergers, go ahead.  Just remember that the car goes in reverse now and then too.  (Chart:  Bloomberg terminal.)

raw material

Given the rush to alternatives, how should you judge whether and how to use them?  For starters, check out the raw material that goes into a strategy, “then you’ll get a better sense of the alchemy that is being proposed.”


The sixth anniversary of the original site was celebrated with a quiet reflection about Memorial Day — and a dedication to those who came before us.

new edition

Another issue of The Prudent Fiduciary Digest is out.  This edition features a great mix of readings on the engrained truths of market narratives, the principal-agent problem in finance, better equity investing, and the virtue of simple communication.