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So Far So Good for This Long-Short Equity Fund

Bronze-rated Schwab Hedged Equity has been a top-quartile risk-adjusted performer, but it hasn't yet faced a sustained downturn.

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Patricia Oey: Bronze-rated Schwab Hedged Equity is a long-short equity strategy that employs a systematic process with a qualitative overlay. Comanagers Jonas Svallin and Wei Li both have extensive experience employing quantitative tools for investing, and they are supported by a five-person team.

The process starts by ranking a universe of about 3,000 U.S. companies using four types of screens: healthy or improving fundamentals, attractive valuations, momentum, and low risk. The managers take about 1,600 of the largest, highest-ranking names and then groups them by sector. They then apply another set of signals, which are customized by sector. Then the stocks are grouped into 55 industries and ranked. The managers use a portfolio-optimization software to reduce unintended bets on sectors or risk factors, as well as to minimize transaction costs. The team continuously monitors the portfolio and may make some adjustments after additional fundamental analysis.

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Patricia Oey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.