Mutual fund managers, like all investors, are prone to emotional mistakes. They buy on whims and hold onto poor choices too long.
Looking at the last five or 10 years, you can see how many funds have underperformed the averages.
If you’d like your funds managed by hard facts rather than foggy feelings, you have another path you can take: invest in “quant” funds, which select their portfolios solely on quantitative measures. Taking the emotion out of investing may reduce some behavioral errors.
Indeed, some quant funds have done very well:
- Of all the domestic funds tracked by Morningstar, Bridgeway Ultra-Small Company (23.51 percent annualized return) and Bridgeway Aggressive Investors (21.90 percent) have the second and third highest 10-year returns, through the third quarter of 2005.
- Numeric Investors Small Cap Value (23.56 percent) ranks among the leaders in five-year returns.
Besides the opportunity for outstanding performance, investing in a quant fund may offer other benefits, such as reducing your risk of “style drift.” For example, if you want a small-company growth fund, choosing a quant fund makes it less likely you’ll wind up owning a value fund or a mid-cap fund. You also can avoid eccentric behavior on the part of a fund manager who makes an intuitive leap that falls off a cliff.
