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By Greg Carlson | 04-30-2015 02:00 PM

A Small-Growth Quant Fund With a Smoother Ride

By emphasizing cash flow and earnings quality over momentum measures, Silver-rated T. Rowe Price Diversified Small Cap Growth has turned in consistent, peer-beating performance.

Greg Carlson: The Morningstar Medalist of the Week is T. Rowe Price Diversified Small Cap Growth (PRDSX). This fund has been run since late 2006 by Sudhir Nanda. He has been the portfolio manager for eight and a half years now; he worked on T. Rowe Price's quantitative team for a while before that.

Yes, this fund is run by quantitative stock-picking models. That has been a troublesome area in the mutual fund market in recent years. A lot of quant funds did very poorly in 2008's sharp decline as well as in the ensuing rebound over the next couple of years. However, this fund has provided a smoother, more predictable performance record. The reason for that is that the models are a bit different. There is less reliance on momentum-based measures. Instead, the fund favors a valuation model that's based on cash flow, which Nanda believes is a more stable measure, as well as earnings quality. Momentum is a smaller piece of the pie here. It does exist, but portfolio turnover, as a result, is much lower here than at the typical quant fund, which tends to trade fairly rapidly.

The result has been, as I said, very consistent performance. The fund has beaten its typical small-cap-growth peer in all eight full-calendar years during Nanda's tenure. The fund has beaten more than 95% of its peers on both a total-return and risk-adjusted basis during his full tenure from October 2006 through March 2015. Costs are also pretty low here on a relative basis. The fund charges 85 basis points for the Investor shares, so it gets a Positive [rating] for price as well.

Overall, [the fund] earns a Morningstar Analyst Rating of Silver, and we think it's a solid long-term holding.

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