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:
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:
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:
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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In today’s issue, Barron’s profiles the MainStay ICAP International Fund (ICEUX, class I shares; ICEVX, class A shares). According to the article
Over the long haul, the fund has a stellar record, beating 87% of its peers over 10 years, and 76% over 15. Senser has helped lead the fund since its 1997 inception.
First, there is no mention of the portfolio manager who left the fund in early July 2014, after an almost 27-year long tenure. Hence the effort to convey a sense of management continuation by using the “has helped lead” phrase.
Second, the article uses class I shares as a basis for its evaluation of the fund. This share class requires a minimum $5 million initial investment, which is impractical for most individual investors. Clearly, such a high threshold is designed to convert a former accessible no-load share class to an “institutional” share class:
Effective 9/1/06, ICAP International Fund was renamed MainStay ICAP International Fund. At that time, the Fund’s existing no-load shares were redesignated Class I shares.
These shares have a lower expense ratio than the class A shares (0.95% vs. 1.27%) and are not encumbered by the initial sales charge of up to 5.5%. Consequently, the performance of class I shares has been much better than that of the class A shares:
Although class C shares of the fund have an investment minimum of only $1,000, they carry a prohibitively high expense ratio of 2.14%. For the purpose of further analysis, we will use class A shares. (However, with a minimum initial investment of $25,000, class A shares are not individual-investor-friendly either.) This share class was introduced in September 2006. Therefore, as of this writing 10-year performance statistics are not available.
The primary benchmark for the fund is the MSCI EAFE index, whose practical embodiment is the iShares MSCI EAFE ETF (EFA). The ETF outperformed the fund in terms of both annualized returns and the Sharpe ratio over the three- and five-year periods through July 2014.
Alpholio™ calculated that since inception class A shares of the fund returned more than the ETF in about 57% of all rolling 12-month periods. The median outperformance was 0.36% but the mean a negative 0.02%. However, given the fund’s recent focus on Japanese stocks, a static index like the MSCI EAFE may not be the best benchmark.
Let’s take a look at the risk-adjusted performance of the MainStay ICAP International fund using Alpholio™’s methodology. Here is the cumulative RealAlpha™ chart for the fund:
Since 2006, the fund’s cumulative RealAlpha™ trended flat to lower on average. As a result, the annualized discounted regular RealAlpha™ for the fund was a negative 0.46% and the lag one a negative 0.03% (to learn about the differences between the regular and lag RealAlpha™, please consult our FAQ). At 19.6%, the fund’s standard deviation was about 1.75% higher than that of its reference ETF portfolio.
The following chart illustrates the composition of the fund’s reference ETF portfolio in the same analysis period:
The fund had top equivalent positions in the iShares Europe ETF (IEV; average weight of 23.4%), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 16.6%), iShares MSCI Germany ETF (EWG; 15.9%), iShares MSCI Japan ETF (EWJ; 14.4%), iShares MSCI United Kingdom ETF (EWU; 7.0%), and SPDR® EURO STOXX 50® ETF (FEZ; 5.8%). The Other component in the chart collectively represents six additional ETFs with smaller average weights.
Overall, since inception class A shares of the MainStay ICAP International fund delivered an unimpressive performance when measured on a fully-risk adjusted basis. A substantial front sales charge coupled with a steep initial investment do not add to the fund’s appeal. A recent departure of a long-time manager also casts doubt on the future performance of the fund.
To learn more about the MainStay ICAP International and other mutual funds, please register on our website.