Out of Favor and Poised to Recover
Meeder Quantex Fund
Author: Ticker Magazine
Last Update: Aug 29, 10:22 AM ET
|Mid-cap stocks offer two attractive features to investors: financial stability and flexible management to harvest the growth that lies ahead. However, these companies, too, fall out of favor as businesses go through the downs of the business cycle before they recover. Bob Meeder, President and CEO of Meeder Investment Management, explains how the Meeder Quantex Fund benefits from rules-based investing in identifying such undervalued stocks and harvesting their gains with an emotionless investment discipline.
“When we developed our quantitative investment strategy, our goal was to create a tool that would remove the emotion and qualitative considerations from the stock selection process.”
The model focuses only on the stocks that fall within that range.
Q: Have you ever modified your model?
Actually, we did tweak the model once three years ago when we incorporated the quality and beta analysis. That is the only modification we have made since it was originally constructed in 1989.
We are always looking for ways to improve our stock selection process, but unless our research gives us confidence that a modification will enhance the results, we will stick with our current model.
Q: Why is the fund rebalanced annually?
When we originally built the model, our testing showed that that an annual rebalance was superior to semi-annual, quarterly, or monthly updates. Perhaps by letting the winners run a full year gave the performance a little boost.
Also, annual rebalancing has an additional advantage of being tax efficient in terms of capital gains and income distributions.
Q: Do you consider revenue or earnings growth in you stock selection?
We do not look at either of these metrics. We are strictly focused on stocks of good companies that are currently out of favor and have the potential for rebounding. Our valuation does not explicitly look at growth expectations, but rather assesses whether or not a stock has become undervalued and is poised to recover.
Q: What is your benchmark index?
Well, it is somewhere between the Small- and Mid-Cap Indexes. An appropriate index to benchmark the fund’s performance would be an equal blend between the S&P Mid-Cap 400 Index and the Russell 2000 Index.
Q: What is your portfolio construction process?
At the beginning of each year, we reconfigure the portfolio so that every name starts with an equally-weighted position. Typically, the maximum for any name is 1% of the total portfolio. And on average, we are diversified by having 100 to 130 different securities.
Every week we run the quality and beta filters. If a stock falls into one of the filters, it is eliminated from the portfolio.
We also maintain an allocation in S&P Mid-Cap 400 futures and use that allocation to balance our cash flow needs. For stocks that have appreciated outside our market-cap range we sell and reinvest in other stocks within the portfolio.
Q: How do you define and manage risk?
By relying on our model and using the beta filter, we avoid investing in stocks that have high betas or excess volatility and trade out of the names. Our other quality model determines if the companies that are sufficiently sound enough to weather a storm.
We prefer companies that have historically developed a level of quality but have fallen on hard times.
1 2 More: Mutual Funds Archive