23
Morningstar FundInvestor
April 2
013
Morningstar Analyst Rating
04-02-13
´
Morningstar Pillars
Process
Performance
People
Parent
Price
¶
¶
Neutral
Positive
Positive
Neutral
Positive
Morningstar Analyst Rating
Morningstar evaluates mutual funds based on five key pillars, which
its analysts believe lead to funds that are more likely to outperform
over the long term on a risk-adjusted basis.
Analyst Rating Spectrum
Œ „ ´ˇ ¨
Pillar Spectrum
Positive
§
Negative
¶
Neutral
NAV
12.49
12.55
12.87
12.60
12.69
11.82
12.44
12.42
12.22
12.25
12.70
11.46
Total Return %
-0.48
0.27
4.50
1.44
10.05
-0.63
7.14
5.87
-0.24
0.57
15.18
9.27
+/-S&P 500
-11.09
-15.73
2.39
-13.62
-16.41
36.37
1.65
-9.92
-5.15
-10.31
-13.50
31.37
+/-BofAML LIBOR3M
-0.56
-0.24
4.23
1.11
9.06
-4.45
1.50
0.78
-3.38
-0.73
13.89
7.32
Income Return %
0.00
0.73
0.00
0.00
0.45
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Capital Return %
-0.48
-0.46
4.50
1.44
9.60
-0.63
7.14
5.87
-0.24
0.57
15.18
9.27
Total Rtn % Rank Cat
70
49
24
21
8
44
26
55
71
76
1
34
Income $
0.00
0.09
0.00
0.00
0.05
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Capital Gains $
0.00
0.26
0.30
0.27
0.26
0.52
0.87
0.52
0.00
0.52
0.50
0.14
Expense Ratio %
.
1.44
1.52
1.63
1.95
1.90
1.95
1.95
1.95
1.95
1.95
1.94
Income Ratio %
.
-0.83
-0.93
-1.12
-1.34
-0.25
0.23
-0.28
-1.16
-1.69
-0.97
-1.18
Turnover Rate %
.
563
389
371
709
712
383
394
387
251
511
2529
Net Assets $mil
954
996
1,066
888
373
118
82
81
104
177
207
41
Performance
03-31-13
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Total
2009
2010
2011
2012
2013
2.45 4.71
1.18 1.39 10.05
1.73 -2.40
2.38 -0.21
1.44
1.11 0.94
0.86 1.51
4.50
0.70 -0.77
-0.47 0.82
0.27
-0.48
. . . .
Trailing
Total
+/- +/- BofAML %Rank Growth of
Return% S&P 500 LIBOR3M Cat
$10,000
3 Mo
6 Mo
1 Yr
3 Yr Avg
5 Yr Avg
10 Yr Avg
15 Yr Avg
-0.48 -11.09
-0.56
70 9,952
0.34 -9.85
0.17
55 10,034
-0.90 -14.86
-1.33
62 9,910
1.31 -11.36
0.93
46 10,398
3.02 -2.79
2.09
20 11,604
4.04 -4.49
1.85
17 14,859
. . . . .
Tax Analysis
Tax-Adj Rtn% %Rank Cat Tax-Cost Rat %Rank Cat
3 Yr (estimated)
5 Yr (estimated)
10 Yr (estimated)
0.47
48
0.83
92
2.02
18
0.98
91
2.88
12
1.12
50
Potential Capital Gain Exposure: -2% of assets
Rating and Risk
Time Load-Adj
Morningstar
Morningstar
Morningstar
Period Return % Rtn vs Cat
Risk vs Cat
Risk-Adj Rating
1 Yr
-0.90
3 Yr
1.31
Avg
-Avg
5 Yr
3.02
+Avg
Avg
10 Yr
4.04
Avg
Avg
Incept
4.91
Other Measures
Standard Index
Best Fit Index
S&P 500
Alpha
0.3
1.6
Beta
0.07
0.06
R-Squared
11
17
Standard Deviation
3.32
Mean
1.31
Sharpe Ratio
0.38
Morningstar’s Take
by Mallory Horejs 04-02-13
Asset growth and organizational changes may have
caused Arbitrage fund’s recent returns to slip, but the
fund remains a good choice.
John Orrico, Todd Munn, and Roger Foltynowicz
have run this merger arbitrage strategy successfully for
over a decade. Their top-quintile annualized five- and
10-year returns have certainly attracted
attention--within three years the fund has grown to $3
billion from $500 million (as of March 2013). For a
capacity-constrained strategy that has historically
focused on smaller-cap deals, these sizable inflows
raise some red flags. For one, the larger portfolio has
forced management to stray from the smaller-cap focus
that made them successful in the past: as of Dec. 31,
2009, roughly 40% of assets were invested in deals
below $1 billion, but as of 2012 year end, the team
allocated only 13% to these deals.
Furthermore, management has also broadened the
strategy to include more international deals. Half of the
portfolio is allocated to companies outside the United
States (primarily to Canada, Australia, Asia, and the
United Kingdom), up from 12% three years ago. Over
the past three years the fund’s advisor, Water Island
Capital, has hired seven new analysts, four of which
cover Europe and Asia. Expanding the shop’s
geographic expertise is good in that it may help to
balance out weak merger activity at home and in
Europe. However, it may also expose the fund to new
risks. In 2012, for example, the team invested in three
deals that ultimately broke, two of which involved
foreign firms. Losses on these positions, as well as on
a handful of delayed deal closures, led to a middling
0.27% return for the year.
Despite an uninspiring 2012, the fund still has
plenty of positive attributes. The long-tenured
management team’s stability and experience give the
fund a big advantage relative to the slew of recently
launched alternative offerings. Further, the team has
historically demonstrated good risk management, as
the fund has only lost money in two of 12 years. Low
fees give the strategy a leg up on its pricier peers.
Overall, this fund continues to serve its investors well.
Address:
Arbitrage Funds
Oaks, PA 19456
800-295-4485
Web Address:
Inception:
09-18-00
Advisor:
Water Island Capital LLC.
Subadvisor:
None
NTF Plans:
Fidelity Retail-NTF, Schwab OneSource
Minimum Purchase:
$2000
Add: $0 IRA: $2000
Min Auto Inv Plan:
$2000
Add: $100
Sales Fees:
No-load, , 2.00%R
Management Fee:
1.25% mx./1.00% mn., 0.04%A
Actual Fees:
Mgt:1.04% Dist:0.25%
Expense Projections:
3Yr:$703
5Yr:$1204 10Yr:$2581
Income Distribution:
Annually
Data through March 31, 2013
Arbitrage R
Ticker
Status Yield Total Assets
Mstar Category
ARBFX Open
0.7% $2,957 mil
Market Neutral
78% 84% 79% 99% 67% 86% 80% 56%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 03-13
Historical Profile
Return
Risk
Rating
Average
Average
Neutral
Investment Style
Equity
Stock %
Manager Change
Partial Manager Change
Growth of $10,000
Investment Values of
Fund
Investment Values of
S&P 500
Performance Quartile
(within Category)
History
10.0
7.0
12.0
14.0
16.0
Portfolio Analysis
12-31-12
Share change since 11-12 Total Stocks:60 Sector
PE Tot Ret% % Assets
State Street Instl Liqui
. . .
39.04
Nexen, Inc.
Energy
. .
8.93
Shaw Group Inc
Industrl
. .
6.70
Celtic Exploration Ltd.
Energy
. .
6.19
Astral Media Inc.
Cnsmr Cyc 15.5 22.24 5.90
Coventry Health Care, In
Hlth care 13.4 5.19 5.15
Robbins & Myers, Inc.
Industrl
. .
4.70
Ralcorp Holdings, Inc.
Cnsmr Def
. .
3.52
Warnaco Group Inc
Cnsmr Cyc
. .
3.41
SOFTBANK Corp
Comm Svs 15.9 25.81 3.29
Hudson City Bancorp, Inc
Finan Svs 17.3 7.26 3.25
NRG Energy Inc
Utilities
11.3 15.62 3.04
Plains Exploration & Pro
Energy
20.4 1.13 2.81
MetroPCS Communications
Comm Svs 10.2 9.66 2.41
TNT Express NV
Industrl
.
0.00 2.21
Sunrise Senior Living, I
Hlth care
. .
2.18
Grupo Modelo, S.A.B. de
Cnsmr Def 29.0 1.07 2.16
Sundance Resources Limit
Basic Mat
. .
2.04
Sprint Nextel Corp
Comm Svs
.
9.52 2.02
Fraser and Neave Limited
Cnsmr Def
. .
1.56
Current Investment Style
Market Cap %
Giant
6.8
Large
15.3
Mid
57.4
Small
14.2
Micro
6.4
Avg $mil:
3,942
Value Blnd Growth
Large Mid Small
Value Measures
Rel Category
Price/Earnings
Price/Book
Price/Sales
Price/Cash Flow
Dividend Yield %
17.24
1.79
1.15
7.82
0.82
1.21
0.99
1.13
1.20
0.47
Growth Measures
% Rel Category
Long-Term Erngs
Book Value
Sales
Cash Flow
Historical Erngs
12.04
0.75
-0.02
-0.53
3.71
1.05
0.20
NMF
NMF
0.63
Profitability
% Rel Category
Return on Equity
Return on Assets
Net Margin
7.87
3.10
3.90
0.51
0.52
0.40
Sector
Weightings
% of
Stocks
Rel
S&P 500 High
3 Year
Low
Cyclical 28.45 0.91
BasicMat 3.02 0.99 31 3
CnsmrCyc15.41 1.35 15 1
FinanSvs 9.97 0.68 12 1
Real Est 0.05 0.02 2 0
Sensitive 48.94 1.16
CommSrvs10.11 2.37 10 0
Energy 20.53 1.89 21 2
Industrl 16.07 1.49 25 7
Technlgy 2.23 0.14 26 2
Defensive22.61 0.85
CnsmrDef 8.76 0.82 12 0
Hlthcare 9.95 0.80 23 10
Utilities 3.90 1.13 17 3
h
r
t
y
u
j
i
o
p
a
k
s
d
f
Composition - Net
(% of Stock)
Cash 29.0
Stocks 70.5
Bonds 0.0
Other
0.5
Foreign 46.9
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2013Morningstar, Inc.All rights reserved. The information herein isnot represented orwarranted to be accurate, correct, complete or
timely. Pastperformance isnoguarantee of future results.Access updated reports at
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mfb.morningstar.com.
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