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Quant Mutual Funds Top the Benchmarks


Should shareholders dump their Vanguard index funds and shift to the company's quant offerings? No, says Vanguard's John Ameriks. "For core holdings, indexing is a great way to go," says Ameriks. "If you want to try to do better than the benchmark, then a quantitative fund can complement the core holding."

Among the top quant performers is TFS Small Cap. During the past five years, the fund returned 27.5% annually, outdoing 98% of small blend peers. The TFS portfolio managers also use their quant models to run TFS Market Neutral (TFSMX), a steady fund that has returned 5.4% annually during the past five years, outdoing 78% of market neutral peers.

The TFS managers run several different models. One model emphasizes stocks with attractive fundamental characteristics, such as low prices and strong earnings. Another model tracks the so-called smart money, buying stocks that are favored by investors with successful track records. Each model is used to manage a separate pool of money. The pools are combined in one mutual fund portfolio. "If one model is doing poorly, it may not hurt the other models," says portfolio manager Eric Newman.

Newman cautions that the TFS managers often trade rapidly. That can result in taxable short-term gains. To control costs, he suggests holding the fund in a tax-sheltered retirement account.

Fidelity Small Cap Enhanced stays broadly diversified, holding about 500 stocks. The model favors undervalued stocks with high returns on equity and strong earnings growth. During the past five years, the fund returned 21.4% annually, outdoing 62% of peers. When markets turn rough, the portfolio managers aim to limit losses by emphasizing low-volatility stocks. "We are able to shift factors as the environment changes," says portfolio manager Maximilian Kaufmann.

The Fidelity fund tends to hold high-quality stocks. That helped limit losses in 2008 and enabled the fund to outdo most peers for the year.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


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