Quantitative funds appeal to many because the funds are purely numbers driven---it's the computers that pick the stocks the fund's manager invests in and that's it. But here's a fund that likes to play both sides of Wall Street's brain; the quantitative and the qualitative sides.
When Steve Esielonis, co-portfolio manager of the Quantitative Growth & Income Fund (1-800-331-1244), first joined the fund in 1992, he brought with him some new perspectives.
"I am not a quant. I don't have an advanced degree in mathematics. I'm not a physicist. I'm not a computer person. I came to quantitative investing later in my career and my training has always been fundamental, " says the 43-year old.
So, while the fund originally started out as a pure quantitative one, as time went by and performance started to lag, it became obvious that quant models aren't always infallible. And, that during volatile market environments, the models didn't always incorporate all the latest data.
"What I did in '96 was to incorporate a new model that's a sector selection model and an industry selection model. We call it ESP, equity sector probability," says Esielonis.
ESP is a model built around an established theory that notes interest rates will have an impact on corporate earnings. As the model goes, when interest rates are low, certain industries will do better than others.
Using that new information the model is currently telling Esielonis to invest in, or remain invested in, stocks in the home building industries, home appliance manufacturers, technology issues, diversified financial companies, and health care companies.
But there's more to stock selection process in this fund. There are also a couple of other layers of information that gets looked at---value and growth data.
Because the fund only invests in large- to mid-sized companies, the computer starts with 6000 companies, whittles that down to 1500 and then ranks the companies group based on value triggers---- like looking at cash flow, earnings, etc.---within various industries. " That means we will look at oil stock vs. oil stocks. Computers vs. computers. so that within each industry group we are finding the best values, " says Esielonis.
A similar ferreting strategy is used for growth stocks.
But wait. There's still more. If the computer signals a buy or sell on a stock that Esielonis likes, he'll think about that data rather than immediately act upon it. For example, take the IBM and Dell deal that made news earlier in the month. "If the models said buy or sell IBM or Dell, I would have said, 'Wait a minute. The models don't know what just happened (regarding this news).' And that's where the qualitative overlay comes in, " he says.
You'll find between 85 and 125 stocks in the Quantitative Growth & Income Fund's portfolio. Some of the top holdings include Compaq, Home Depot, Schering Plough and Dell.
As for performance, the goal of the fund is to beat the S & P 500 by two to three percent over a market cycle which Esielonis defines as three to five years in length. Over the past two years, the fund has had a total return in 1998 of 29.53 percent, and in 1997, ahead 36.67 percent, according to Lipper, Inc.
This year, however, the fund's year-to-date performance is up 1.76 percent through March 11. Clearly lagging the S & P 500. What's Esielonis got to say about that? He still likes the stocks in the fund's portfolio and says that until the end of the quarter, when the models kick out new information, he can't find a reason for selling the stocks he owns other than the one that they are going down in price.
"Our tech stocks have been getting hammered, we're underweighted in basic materials and in energy, but for now we're sitting on what we have."
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