Could Adding MERFX Impact Your Portfolio?
Merger arbitrage
During corporate stock-to-stock mergers, a merger arbitrageur buys the stock of the target company while shorting the stock of the acquiring company. The stock price of the target company usually remains somewhere below the acquisition price. This discount is mainly due to the market’s uncertainty about whether or not the merger will truly occur. The “merger arbitrage” strategy uses funds like The Merger Fund (MERFX). It relies on discounts to achieve its investment objectives.
The above graph compares MERFX’s YTD (year-to-date) performance with the market S&P 500’s (SPY) YTD performance.
MERFX versus SPY
The above graph compares the price movement of $100 invested in MERFX and SPY from January 1 to December 7, 2015. Due to the low-risk nature of MERFX’s merger arbitrage strategy, the volatility risk of the portfolio’s performance is considerably reduced compared to SPY’s volatility. However, the fund underperformed. It had a negative YTD return of 0.8%.
Valuation multiple
MERFX’s average PE (price-to-earnings), PBV (price-to-book value) and price-to-cashflow ratios are 39.34, 2.07, and 11.68, respectively, as of December 7, 2015. The average dividend yield of MERFX’s total portfolio is 1.9%. Some of MERFX’s top holdings with long or short positions are AIG (AIG), Broadcom (BRCM), Partnerre (PRE), Yahoo! (YHOO), and General Motors (GM).
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