First American Funds
has added three new large-cap quant funds to its line-up. The three new funds are the First American Quantitative Large Cap Value Fund
, the First American Quantitative Large Cap Core Fund
, and the First American Quantitative Large Cap Growth
First American Funds announced today that it is entering the fast-growing market for quantitative mutual funds with three new large-cap funds that use a macroeconomic process differentiating them from other quantitative funds in the marketplace. The process includes proprietary models that assess how stocks in underlying indices may perform in various macroeconomic and market conditions. The funds blend this proprietary economic/market analysis with quantitative statistical models, computer-driven portfolio models, and tightly constrained risk relative to benchmarks for state-of-the-art quantitative portfolio construction. With this process, the funds seek to provide investors with the potential for outperforming underlying indices while limiting downside risk relative to the benchmark.
The three new Quantitative Funds and their benchmark indices are:
The First American Quantitative Large Cap Value Fund seeks out companies that appear under priced. Share classes A,C,R, and Y are available. Its benchmark is the Russell 1000 Value Index.
The First American Quantitative Large Cap Core Fund invests in both value and growth stocks. Share classes A,C,R, and Y are available. Its benchmark is the S&P 500 Index.
The First American Quantitative Large Cap Growth Fund seeks out companies that may provide better-than-average growth potential. Share classes A,C,R, and Y are available. Its benchmark is the Russell 1000 Growth Index.
1 The umanaged Russell 1000 Value Index tracks the performance of companies within the Russell 1000 Index with a greater-than-average value orientation.
2 The unmanaged S&P 500 Index tracks the performance of 500 large company stocks.
3 The unmanaged Russell 1000 Growth Index tracks the performance of companies within the Russell 1000 Index with a greater-than-average growth orientation.
Highly Experienced Managers
The Large Cap Quantitative Funds are managed by seasoned professionals who average 22 years of investment industry experience. Walter French, the funds’ lead portfolio manager, originated the proprietary models that drive the funds’ quantitative process more than 15 years ago. He has extensive experience in building and enhancing quantitative models and oversees the funds on an ongoing basis.
Chief Economist Keith Hembre provides the economic research that is incorporated into the models to ensure that they accurately reflect historical and current economic themes. In addition, the team is supported by two co-managers and a quantitative analyst.
The Process: Adding Value and Limiting Risk
The philosophy of the First American Large Cap Quantitative Funds process is that equity markets reflect the macroeconomy in quantifiable ways. Hence, managers believe that investments respond to the macroeconomic/market environments in ways that can be quantified, modeled, and understood. Their proprietary process tracks linkages between approximately two dozen economic variables (e.g., business output measures, income, inflation, foreign-exchange rates, etc.) and several dozen broad investment factors (e.g., style, earnings and equity valuation, volatility of earnings, balance sheet quality measures, size, etc.). Each link-up is driven by theory. The process has measured the investment factors in all types of environments, including expansions and recessions, easy and tight money, various inflation regimes, periods of military conflict, and strong and weak dollars.
Through this process, managers have learned how categories of stocks respond to a variety of environments. For example, they’ve learned that high inflation or sharp changes in business fundamentals can cause “value” stocks (those with high book-to-market ratios) to underperform. Similarly, they’ve found that cyclical stocks, like autos, do well when consumers enjoy a high comfort level from ongoing gains in real income, good employment, and attractive financing costs. Alternatively, they’ve found that cyclical stocks underperform the market when an economic slowdown looms, especially in response to a credit squeeze. They’ve also learned that stocks with strong recent performance are hardest hit when the Federal Reserve increases interest rates, as it did in mid-2006. By anticipating future economic trends, the funds’ managers may also be able to anticipate reversals in stocks that have recently outperformed.
These concepts are operationalized through a process that attempts to analyze each stock in an underlying index to measure the sensitivity and interaction of the stock with each macroeconomic variable and investment factor. Then optimization techniques are used to build a portfolio with stocks that portfolio managers believe have the greatest promise of generating the highest expected returns subject to a tracking-error constraint of ±2% relative to the benchmark. This results in a portfolio that managers believe is positioned to outperform the index without assuming significant additional risk.
“Our simple objective is to add the highest-value stocks to the portfolio while adhering to a strict 2% tracking-error budget,” French explains. “We’ve been tracking investment themes for more than 15 years, so we really know where we’ve added value and where we were smartest to limit risks.”
Meeting Investor Needs
Quantitative investing has become popular during the past few years as investors look for ways to add alpha4 to index investing. The First American Funds’ active management strategy5 offers investors this opportunity while tightly constraining risk. Further, the funds’ net expenses are well below average expense ratios for traditionally managed large-cap funds.
“We utilize a results-driven process, with all our actions designed to consistently add value for investors while maintaining index-level risk,” French said.
About First American Funds
The First American Funds mutual fund group had more than $70 billion in open-end funds as of June 30, 2007. The funds are advised by FAF Advisors, Inc.
4 Alpha is the measurement of risk-adjusted performance of a fund compared to its benchmark.
5 Active management is an investing strategy that seeks to outperform the broad market benchmark.
Each fund’s investment objectives, risks, charges, and expenses may be considered carefully before investing. The prospectus contains this and other information; call 800.677.FUND or visit firstamericanfunds.com for a copy. Read the prospectus carefully before investing.
Mutual fund investing involves risk; principal loss is possible.
First American Quantitative Large Cap Funds are actively managed and may underperform their benchmark. The funds may trade more often than “buy and hold” funds in their peer group, and this increased trading activity may result in increased fees, expenses, and taxes.
FAF Advisors, Inc., a registered investment advisor and subsidiary of U.S. Bank National Association (NYSE:USB), serves as an investment advisor to First American Funds. First American Funds are distributed by Quasar Distributors, LLC, an affiliate of the investment advisor.
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