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This Fund Takes a Scientific Approach to Stock Selection

Alex Bryan, CFA

Alex Bryan: AQR Large Cap Multi-Style (QCELX) is a compelling U.S. large-cap strategy. It follows a rules-driven approach that targets stocks with low valuations, strong recent price performance (or momentum), and strong profitability. Each of these characteristics has been associated with higher long-term stock returns in nearly every market studied over the long term, but they don't always work. Putting these investment styles together reduces the risk of extended periods of underperformance because each style tends to work best at different times.

This fund pursues those style tilts more aggressively than many of its peers, which should give it an edge if these themes continue to pay off. At the end of each month, the fund assigns composite style scores to the largest 1,000 U.S. stocks based on select value, momentum, and profitability metrics. It targets the top-scoring 25% and weights these holdings according to both their market capitalization and the strength of their style characteristics.

The managers create a target portfolio based on the average stock weightings in the model portfolios during the past few months to smooth out turnover, which can be high. They rebalance the portfolio each month but take transaction costs into account when deciding whether to trade.

This fund was just launched in March 2013, so it doesn't yet have a significant live record. But it has gotten off to a pretty good start. It has outpaced the Russell 1000 Index by 95 basis points annually since its inception. While AQR's million-dollar-plus investment minimums may seem out of reach for many, it waives the minimums for investors who access their funds through a financial advisor. This particular fund is also available on select brokerage platforms, like Scottrade.