Quant funds -- quant is short for quantitative -- use computer models rather than humans to pick stocks and are a growing segment of the fund market. They're also a natural extension for index pioneer Vanguard, which relies heavily on computers to manage its funds that simply seek to match their bogeys. Its quant funds, by contrast, seek to beat their benchmarks.
The latest addition to the Valley Forge, Pa., firm's computer-driven lineup is Vanguard Strategic Small Cap Equity. The fund (symbol VSTCX; 800-635-1511) cherry picks the most promising stocks in the MSCI US Small Cap 1750 Index using three models: one that focus on measures of value, such as price-earnings ratios; another that looks for stocks with upward price and earnings momentum; and a third that hunts for earnings growth.
Applying a quantitative strategy to small companies makes sense given that the options are vast and tiny firms attract less analyst coverage than large companies do. To curtail risk, Small-Cap Equity sticks with sector weightings identical to its benchmark. The fund's sprawling portfolio includes 450 stocks diversified across all sectors, so holdings range from Puget Energy, a utility, to women's clothing retailer Ann Taylor Stores to book dealer Barnes & Noble.
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The same computer models power the engines of Strategic Small-Cap's older sibling, Vanguard Strategic Equity. That fund (symbol VSEQX), which invests in midsize companies, returned an annualized 12% over the past decade to February 1, an average of three percentage points per year more than the typical midsize-company fund. Like most Vanguard funds, Strategic Small-Cap Equity benefits from low expenses -- 0.40% per year. The fund, which began in April 2006, returned 7% from inception to February 1, two percentage points more than the average small-company fund.
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