Stocks rebounded sharply off July lows, and last month’s reading of the Consumer Price Index (CPI) showed easing, albeit modest, of inflation. Those are positive points, but they don’t imply that broader market volatility is dead for the remainder of 2022.
In preparation for volatility rearing its ugly head again, or for those market participants looking for an alternative to bland, sagging fixed income funds, alternative strategies such as the Merger Fund MERIX are worth examining.
Specific to MERIX, the Virtus fund is an ideal consideration today, and not just as a play on a potential resurgence in mergers and acquisitions activity. Amid dislocation in the bond market, MERIX merits attention.
“The current dislocation is partially attributable to the ‘deer-in-the1headlights’ scenario,” wrote MERIX’s managers in their second-quarter commentary. “One important example is the drying up of liquidity. Banks/trading desks have cut back tremendously on the ability of the traders to hold an ‘inventory’ to facilitate trades. This is important in ordinary times to make sure that traders with an interest in buying or selling have healthy volume and a tight bid-ask spread. Given the lack of inventory, there is a ‘wait and see’ moment where bond prices have dislocated due to technical reasons.”
While MERIX was active in the first quarter, investing in 49 various transactions, the fund is gaining traction among investors this year due in large part to rising interest rates. The fund has an established track record of beating corporate bonds as the Federal Reserve tightens its monetary policy. That’s clearly a favorable trait, as are MERIX’s volatility-beating capabilities.
“While market volatility and regulatory uncertainty have caused consternation for event participants, macro challenges like inflation, energy, supply chain shortfalls, the war in Ukraine, and an economic slowdown present incentives for pursuing corporate reorganizations,” added the fund’s managers. “Changing consumer preferences will continue to create opportunities for corporate reorganizations as companies seek to transform business models to reposition themselves for future growth. Moreover, corporate balance sheets still contain record cash levels while the dislocation in equities has made acquisition targets more affordable.”
The aforementioned factors and potential for other headline risk emerging could contribute to elevated spread volatility. However, elevated market stress can be beneficial to the MERIX methodology — try saying that about a pure beta fund — indicating that the actively managed alternative fund could be ideal for a more exciting than expected conclusion to 2022.
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