Five Factor Quantitative Model Propels Alternative Fund to Top in its Category

Morningstar profiled its Fund Managers of the Year, including the fixed income, allocation and alternative categories.


The Fixed-Income Fund Manager of the Year was Jerome Schneider for the PIMCO Short-Term Fund, which marks an unusual appearance of a manager from Morningstar’s Ultrashort-bond category on the list. The fund earned 1.37% when many similar funds failed to achieve positive returns. This was achieved partly by Schneider adjusting “the fund’s curve positioning and rate sensitivity over the course of the year.” He maintained a very short duration early, and lengthened later in response to expectations of a Fed rate hike.


The Allocation Fund Manager of the Year award was shared by Michael Rechmeyer and John Keogh for their management of the Vanguard Wellesley Income fund, which focuses on stability but “doesn’t make tactical shifts between stocks and bonds.” Reckmeyer oversees the 35-40% of the assets invested in equities while Keogh is at the helm of the remaining bond investments. Reckmeyer focuses on equities with above-average dividends, acquiring them especially when they are out of favor. Keogh focuses on corporate bonds in the A range. The fund secured a 1.3% gain for 2015, finishing in the top percentile of the conservative allocation fund category, while achieving  a 7% annualized growth over the last 10 years, which is the second best record of 140 peers over that period.


The Alternative Fund Manager of the Year award was shared by James Tayler, Michael Roach, and James Stetler for their oversight of the Vanguard Market Neutral fund, which has achieved “very low correlation, solid returns when equity markets go south, and . . . the lowest fees of any alternative fund” at 0.25% annually (albeit with a minimum required investment of $250,000). The managers employ a five-factor quantitative model that identifies stocks likely to grow earnings faster than peers that also trade at inexpensive valuation. Individual positions are capped at 0.5% and the allocation is designed to be market neutral, which means that “performance is ultimately driven by the aggregate ability of its model’s highly ranked stocks to outperform the low-ranked stocjs within an industry.” During the third quarter of 2015, the fund gained 7% while the S&P 500 lost 6.4%.