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Fund Spy: Morningstar Medalist Edition

Quant Funds Are Hot Again

But are they reliable?

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Funds that use quantitative stock-picking models are on a roll. A list of 52 U.S.-sold quant funds compiled by Morningstar beat more than 80% of their respective peers over the trailing three years through June 13, and the group outperformed its respective peers in 2011, 2012, 2013, and thus far in 2014.

This hot streak represents a remarkable performance turnaround. 2007-09 was a rough stretch for quant funds. The bear market that kicked off in late 2007 was marked by a sharp reversal of the prior five years of strong performance. Since many quant funds rely to a significant degree on models that track earnings and/or stock-price momentum, the funds were hit especially hard by the bear market, when sharp reversals tripped up those models. Quant mutual funds were also hurt in the bear market when their quant-oriented, hedge fund cousins started dumping commonly held stocks, driving down share prices. Making matters worse, some quant funds then rotated from economically sensitive firms into defensive fare, which held up relatively well in the downturn, only to get left behind again when a rebound began in earnest in March 2009.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.