New funds let machines do the picking

NEW YORK — Would you let a computer pick your investments for you? That’s exactly what happens with quantitative management, and so-called quant funds are in vogue right now.

These funds use computer models — some staggeringly complex, others simple as pie — to pick stocks and bonds. The idea is that a computer can easily sift through a bewildering array of investment choices, like thousands of small- and midcap companies, while a team of human researchers might be able to analyze only a few stocks at a time.

But that’s where the generalizations end, says Kerry O’Boyle, a fund analyst with Morningstar. Some funds use the computer as just another research tool. Others, the true quant funds, he says, allow the machine to drive the portfolio.

There are models that incorporate more than 1,000 variables and models that examine obscure technical parameters of the market. Some models factor in the number of Web hits a company gets.

“It’s completely open to interpretation as to what constitutes a quantitative fund,” says Jeff Tjornehoj, a senior research analyst at Lipper.

No matter what kind of fund it is, the (human) manager always has the final say. After all, a computer model could tell you to sell the entire portfolio or invest heavily in a bankrupt company.

Because quant funds vary so much in how they use computer models, it’s hard to say if they perform better than other funds in the long-run. But they have outperformed actively managed funds over the last five years, says Tjornehoj.

Analysts do complain that, since running a computer is cheaper than paying a team of researchers, quant funds should have lower expenses than their actively managed peers. They don’t. Some funds are not tax efficient either.

Numeric Investors and Dimensional Fund Advisors are among the companies that specialize in computer-driven investing, but the big fund families also dabble.