The July reading of the Consumer Price Index (CPI) checked in at 8.5%, and while that’s below the 9.1% delivered in June, inflation remains stubborn, indicating that the Federal Reserve is likely to remain aggressive when it comes to raising interest rates.
While this year’s rising rates regime is prompting investors to examine assets that are historically positively levered to Fed tightening, not all of those assets are delivering the goods. This could be a sign that market participants may want to consider alternative strategies such as the Merger Fund.
One of the selling points of alternative strategies is that, at least in theory, they provide low correlations to traditional asset classes — a valuable trait at a time when stocks and bonds are faltering like they are this year. MERIX has a history of providing that protection.
“Introduced in 1989, the Fund was the first mutual fund devoted exclusively to merger arbitrage, offering easy access to a time-tested alternative investment strategy with the benefits of mutual fund investing. Merger arbitrage strategies have historically provided attractive absolute returns with lower volatility and minimal correlation, relative to traditional stock and bond strategies, making for a powerful portfolio diversifier,” according to Virtus.
Investors who aren’t familiar with merger arbitrage strategies may be surprised to learn that over the long haul, a fund like MERIX could perform comparably to a basket of investment-grade corporate bonds. However, MERIX comes with the added benefit of being significantly less correlated to the broader fixed income and equity markets.
MERIX can potentially help investors survive and thrive as rates rise. A track record spanning more than three decades confirms as much. After all, there have been multiple rising rate environments since the actively managed fund debuted in 1989.
“Unlike a bond portfolio, however, the Fund has historically exhibited positive correlation with interest rate movements, offering a potential hedge against declining bond values. There have been 10 periods between January 1989 and June 2022 when the 10-Year Treasury yield rose by 1% or more – The Merger Fund® outperformed 10 out 10 times,” added Virtus.
Those are compelling data points. So are the following: MERIX has delivered positive annual performance in 29 of 33 years since its inception. In the 30 quarters over that time in which the Bloomberg Aggregate Bond Index was lower, MERIX outperformed the benchmark 97% of the time while delivering upside 86% of the time.
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