Despite the horror stories in recent months about "quant" hedge funds, mutual-fund investors need not necessarily run for cover when they see words such as "quantitative" and "proprietary model" in a fund's descriptive material.
There are a number of open-end mutual funds run largely with the help of quantitative models that produce steady, positive results and are appropriate for consideration by the typical mutual-fund investor.
Quant funds earned their bad rap in July and August as turbulence from the subprime mortgage imbroglio spread to the broader credit markets and then to equities.
quantitatively-driven Global Alpha flagship hedge fund reportedly lost 22.7% in August.
Another Goldman Sachs quant offering, Global Equity Opportunities, was reported to have sunk around 30% in a single week, while the Morgan Stanley PDT -- for Process Driven Trading -- quant group was said to have lost half a billion dollars in late July and early August.
Troubling reports of steep losses at quant funds Renaissance Institutional Equities, AQR Capital Management and Tykhe Capital LLC also appeared with alarming frequency.
All that might be enough to prompt an investor to run in the other direction. But the big losers of summer were, for the most part, hugely-leveraged hedge funds. Most open-end mutual funds using quantitative models are far less menacing creatures. A number of them, in fact, were racking up impressive gains at the same time some of their less fortunate hedgie cousins were crumbling.
The accompanying table of "quantitative model" mutual funds shows a group that has easily outdistanced the total return of the
over the past 12 months. In addition, each of the funds is ahead of the S&P for the year to date, with all but one sporting gains in the double digits for that period.
In the three-month stretch ended Sept. 30, when the quant hedge funds were being guillotined, all but three of the funds on the list enjoyed positive returns, with 19 of the 25 funds outperforming the S&P for the period.
The list was created by filtering the 20,540 open-end mutual funds in the TheStreet.com Ratings database for those with the words "quantitative" and "model" in their descriptions. That narrowed it down to 224 funds, to which known quants from Bridgeway, the Janus INTECH group, GMO funds, the Federated MDT group and the Vanguard "Strategic" offerings were added.
The few fixed-income funds in the group were eliminated and the list was further screened to produce only a single "primary" fund from multiclass groupings. Institutional funds, which included the quant-savvy GMO funds, were also pared from the list.
The table lists the 25 top 12-month performers from the 79 quant funds that survived the filtering process. They are listed in order of their 12-month total returns.
Five members of the Federated MDT family of quant funds made the cut, followed by four American Century funds, two from the quant-oriented Bridgeway group and two from John Hancock.
The champion of the group is the
American Century Legacy Focused Large-Cap Fund, which has ballooned 44.96% in the past 12 months and 35.54% for the year to date. In the three months ended Sept. 30, it vaulted 18.32%, the very same period the quant hedge funds were suffering their whippings.
The American Century Legacy Focused Large-Cap's quantitative model helped select the fund's largest portfolio holdings of
What distinguishes the quant vehicles on the accompanying list and the hedge quants that were kneecapped earlier in the year?
One of them was the amount of leverage, or borrowed money, the hedgies use.
Another major difference is how they apply their quantitative criteria: The hedgies use quantitative technology as a tool for active trading or market timing.
The typical open-end quant mutual fund, on the other hand, uses a "proprietary quantitative model" primarily to pick stocks, although humans are also typically involved in the portfolio construction process. But they tend not to trade as rapidly.
Quant mutual funds are relatively recent arrivals on the mutual fund scene; only 12 of the 25 funds on the adjoining list having been around for more than three years, which is the minimum track record required to earn a grade from TheStreet.com Ratings.
Three of the funds sport marks in the "A" range and are joined as "buy" recommendations with an equal number with grades in the "B" category.
The remaining six that have enough history for grades are in the "C" range, which equates with "hold" recommendations.
Gordon Ceresino, vice chairman of Federated's MDT Advisers, says the performance of the group's quant funds demonstrates that investors are best-served by a dispassionate, highly disciplined investment process.
"The success that our investors are experiencing results from a disciplined, unemotional process," Ceresino says.
"Although the markets at times can be driven by emotional headline events, history has shown that irrational markets tend to be short-lived, and the markets inevitably revert back to the fundamentals that drive quality stock selection.
"It's all about risk-adjusted returns and consistency over time," he adds.
Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.