Funds With Steady Returns Find Appeal

NARFX hit a couple of bumps in the road in April. The fund was net short the energy sector and the price of crude went parabolic. Additionally, a couple of other ideas did not work out. The net result for the year is that NARFX is down 3.4%.

The result for both funds has been outstanding compared to one of the worst years ever for U.S. equities. But neither has been perfect. This goes toward setting reasonable expectations. In researching this fund segment, you may find funds whose strategy you naturally gravitate toward. Funds may make intuitive sense and seem like they can continue to succeed.

I believe in both funds and use them for clients, but still no product can be 100% successful 100% of the time. As these funds have had small problems before, they will have them again.

Another reasonable expectation to set should be what to expect the next time the stock market is up a lot. These funds strive for steady returns. The stock market provides volatile returns. Since 1950, the S&P 500 has had only four years where it was up between 8% and 12%. I would expect any absolute return or market neutral fund to lag badly during the occasional year where stocks are up 25% or more, something that has happened 11 times since 1950.

The most common criticism that comes up with these types of funds is how expensive they are. In nominal terms they are expensive. RYMFX has a 1.73% expense ratio and NARFX's is 1.99%. If that is too much for you, do not buy this type of product. But in a down 40% world, RYMFX is up a little and NARFX is down low single digits.

I believe in moderate exposure to the space as means of managing portfolio volatility over the course of an entire stock market cycle. I do not think it makes sense to add heavy exposure after a 40% decline. RYMFX and NARFX client or personal holdings