Today’s profile in Barron’s features the MainStay International Opportunities Fund (MYITX, Class A shares). This $575 million foreign equity fund has a maximum 5.5% front sales charge, 3.12% total and net expense ratios, and 136% annual turnover. The fund’s positions may be up 140% long and 40% short. According to the article

The fund is up an average of 9% a year over five years, better than 99% of its foreign large-value peers… The goal is to offer investors broad exposure to international markets, but in a portfolio that doesn’t simply mimic its benchmark, the MSCI EAFE Index. The fund’s active share is consistently more than 95%, unusual for a fund with hundreds of holdings.

One of the practical implementations of the fund’s benchmark is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that since inception, the fund returned more than the ETF in about 72% of all rolling 36-month periods, 76% of 24-month periods, and 68% of 12-month periods. However, it should be noted that since inception the fund’s average annual total return was virtually nil:

Average Annual Total Returns of MainStay International Opportunities Fund (MYITX)

Alpholio™’s patented methodology is based on the construction of a custom reference ETF portfolio for each analyzed fund. In the simplest variant of the methodology, both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. Here is a chart of the resulting cumulative RealAlpha™ for the MainStay International Opportunities Fund, assuming no front load:

Cumulative RealAlpha™ for MainStay International Opportunities Fund (MYITX)

Since inception, the fund produced a slightly negative annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). Were it not for a rebound in the second and third quarters of 2013, the cumulative RealAlpha™ would end up much more negative. The fund’s standard deviation, a measure of volatility of returns, was about 0.5% higher than that of the reference ETF portfolio. A RealBeta™ of 1.09 underscores the fund’s elevated volatility vs. a broad index of domestic stocks.

The following chart shows the constant composition of the reference ETF portfolio over the same analysis period:

Reference Weights for MainStay International Opportunities Fund (MYITX)

The fund had top equivalent positions in the SPDR® S&P® International Small Cap ETF (GWX), iShares MSCI EAFE Growth ETF (EFG), iShares MSCI United Kingdom ETF (EWU), iShares MSCI Germany ETF (EWG), and iShares MSCI Italy Capped ETF (EWI). The Other component in the chart collectively represents additional equivalent positions in other ETFs that had smaller fixed weights.

Since inception, the MainStay International Opportunities Fund delivered an unimpressive performance. The fund could have been substituted, with better return and risk characteristics, by a constant-weight and long-only portfolio of readily accessible ETFs. The fund’s substantial sales charge, coupled with a required minimum $25,000 initial investment, does not add to its appeal.

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