This Fund's Algorithm Is Designed For Consistent Gains

Computer programs may guide the stock picking at T. Rowe Price QM U.S. Small-Cap Growth Equity (symbol PRDSX, but manager Sudhir Nanda is the reason for the fund's success. He designed the system.

Nanda, who was a finance professor before he joined the mutual fund firm, has run QM U.S. Small-Cap Growth since late 2006. The model he built for the fund favors high-quality, highly profitable companies with reasonably priced shares. Over the past decade, QM U.S. Small-Cap Growth, a member of the Kiplinger 25, outpaced 91% of its rivals–funds that invest in small, fast-growing firms–with less volatility. The fund beat the Russell 2000 small-company stock index in eight of the past 11 calendar years.

But U.S. stocks turned topsy-turvy early in 2018, and that had an impact on the fund's 12-month record. For much of that stretch, QM U.S. Small-Cap Growth performed well. Tech stocks, in which more than 20% of the fund's assets are invested, were big drivers of returns during much of the period. Solid growth in the economy and in corporate earnings overall helped, too, as did the promise and eventual passage of lower corporate tax rates. After January, however, volatility returned to U.S. stocks. What had boosted returns earlier in the 12-month period became a drag as tech stocks pulled back.

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Not only that, but the fund's penchant for larger firms in the small-company universe, which tend to have solid balance sheets and hold up better in market downturns, hasn't helped lately. During the market downturn in March, the fund's weakest performers were its larger-capitalization holdings. That was "a bit unusual," says Nanda. "We generally would have expected to do better in a down market."

Although the fund beat the Russell index by close to four percentage points over the past 12 months, it lagged its preferred benchmark, the MSCI US Small Cap Growth index, and its peer group. Still, the fund's previous record in down markets is encouraging. In 2011 and 2015, when the Russell 2000 lost 4% or more in each year, QM U.S. Small-Cap Growth gained 1.5% and 2.3%, respectively, and beat 87% of its peers.