The primary goal of a market neutral fund is to benefit from a manager’s ability to select stocks. Historically, this has typically been managed through a quantitative investment process, but there are more and more fundamental managers entering the space. In selecting stocks for the fund’s long portfolio, the portfolio managers attempt to purchase stocks of companies that they believe are attractive. The same fundamental process is utilized to identify stocks that they believe are unattractive, which will make up a fund’s short positions.
Portfolio managers seek to capitalize on the performance gap (or spread) between longs and shorts across all market conditions. The difference in performance determines a fund’s return, as shown below.
Next week: Equity Market Neutral Investing, Part IV: Our Process.
The opinions expressed are those of our investment professionals, and are no guarantee of the future performance of any American Century Investments® portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.