Charles Schwab Corp. of San Francisco has just re-launched a large-cap mutual fund using a proprietary equity research system.
The Schwab Core Equity Fund is the firm's first investment product to use new ratings software that grades stocks A through F. Although the fund will be actively managed by two portfolio managers, they will base their selections on the Schwab Equity Ratings system that the firm created for its clients in May. The system examines 3,500 U.S. stocks and grades them between A and F based on a number of factors including industry exposure and risk management.
Managers of the Schwab Core Equity Fund will build a portfolio of 150 stocks rated A or B with a market capitalization of $500 million or more, with the objective of beating the performance of the Standard & Poor's 500 index.
Year-to-date through July 29, the fund, which has $185 million in assets under management, has returned a negative 16.8%, beating the S&P 500 index by 4.3%, according to Morningstar of Chicago.
On average, stocks given the top rating are expected to outperform the market within 12 months, while those rated F are expected to seriously underperform the market, according to Schwab.
The fund, previously known as the Schwab Analytics Fund and sub-advised by Symphony Asset Management, a subsidiary of John Nuveen Co. of Chicago, will now be co-managed by Schwab portfolio managers Geri Hom and Larry Mano. Hom manages 12 funds for Schwab, including the Schwab S&P 500 Fund, while Mano is director of Schwab's equity portfolio management group and oversees four funds, including the Schwab Total Stock Market Index fund.
Year-to-date through July 29, the Schwab S&P 500 Fund is down 21.1%, on par with the S&P 500 index, while the Schwab Total Stock Market Index is down 19.2%, beating the index by 1.9%, according to Morningstar.
The quantitative system that Hom and Mano will use will offer investors greater objectivity, the firm claims. The fund will be completely "free from investment banking and commission-based sales conflicts," the firm said in a statement.
Richard Repetto, an equity analyst with Putnam Lovell Securities in New York, said a fund that primarily bases its stock selections on quantitative research rather than live analysts may help Schwab differentiate itself in a market that has plummeted partly because investors have lost faith in financial firms and corporate governance. "Maybe this is an opportune time for them," Repetto said.
"What makes this fund special is the way it blends broad market exposure with a disciplined approach to selecting stocks," said Jeff Lyons, Schwab executive vice president of asset management products and services, in a statement.
"It is truly a value-added approach to mutual fund management because it provides investors with a methodology they can trust and the risk management they demand," Lyons said.
The Schwab Equity Ratings system is part of Schwab's effort to offer more advice-driven brokerage services as individual online investing continues to decline. Its introduction was also timed to win business from Schwab's full-service rival Merrill Lynch, which has come under regulatory scrutiny over allegations that its analysts gave good ratings to stocks to win investment banking business.
Schwab is trumpeting the system in a nationwide television and print ad campaign using the tagline "There's never been a better time for Schwab."
Schwab attracted $12 billion of net new assets during the second quarter, including the $9 billion that has come through the firm's private client service division since May.
New York-based Merrill attracted just $4 billion in net new assets from retail investors in the second quarter. But it was able to report a 17% earnings increase from a year earlier, to $634 million, thanks in large part to cost cutting underway since last year. In contrast, Schwab's profits for the quarter sagged 4%, to $98 million.
