Investing by the numbers, Hub style

MALVERN, Pa. -- Vanguard Group Inc. is turning to Boston's numbers gurus.

The Pennsylvania financial giant is best known for its mutual funds tied to stock market indexes. But among its actively managed funds -- which account for more than half of its $980 billion portfolio -- the company has been expanding its use of money managers who emphasize quantitative methods to select investments.

To do so, Vanguard is parking more of its money in Hub firms that specialize in this area that relies on sophisticated computer models. So far the mutual fund company has $170 billion with Boston advisers, more than half the $290 billion the company has under external management.

One example is the $2 billion now managed by Acadian Asset Management, which in 2004 started running parts of Vanguard's Global Equity fund. Grantham, Mayo, Van Otterloo & Co., now manages $4.5 billion from three Vanguard funds. Also, an originator of quantitative investing, Franklin Portfolio Associates, has $9.2 billion of Vanguard business.

Joseph Brennan, principal of Vanguard's portfolio review group (no relation to Vanguard chief executive John J. Brennan), says the outside firms also provide some diversification. Both Grantham, Mayo and Granahan Investment Management run pieces of Vanguard's Explorer fund, for instance, as does Wellington Management Co., a more traditional Boston money manager with long ties to Vanguard.

''What and how Grantham, Mayo does with its piece of Explorer has nothing to do with what Wellington does with it," Joseph Brennan said. ''It's true diversification."

Traditional mutual fund teams include analysts and researchers who judge stocks and other investments using both quantitative tools like price-to-earnings ratios and qualitative judgments like the economy's impact on consumer demand for the company's products, or confidence in an executive team.

Against this tradition, ''quantitative investing" generally refers to the use of computer models to buy and sell stocks based solely on numbers. Though the design of these programs amounts to a qualitative judgment, the goal is to remove subjective and often risky judgments from investing.

Eighty percent of the work is similar to qualitative analysis, such as calculating a stock's price-to-earnings ratio and its value against its peers. But a quantitative approach will tend to exclude predictions or guesswork such as bets on future oil prices or interest rates, explains Paul Kaplan, a Wellington portfolio manager who handles Vanguard money in two traditional funds.

A potential disadvantage to quantitative investing is that it may involve frequent trades, which can pile up taxes for investors and reduce their gains. Also, management fees can be higher than pure index funds: One fund that Grantham, Mayo helps run for Vanguard, U.S. Value, had an expense ratio of 39 basis points last year, compared with 18 basis points for Vanguard's well-known 500 Index fund. (A Vanguard spokesman says both fees are much lower than the average multicap value fund fees of 1.38 percent).

Still, interest in ''the quants" is growing. Daniel P. Wiener, the editor of a Vanguard investment newsletter, says quantitative investing now accounts for 16 percent of actively managed assets in the United States, up from 13 percent in 2003.

Wiener said Vanguard is turning to quantitative methods partly because the company has run out of areas in which it might create new index funds.

These are funds that buy and sell securities aiming to achieve the same return as a broad-based index such as the Standard & Poor's 500. Index funds have lower fees and are passively managed, which means investment choices are tied to a benchmark of stocks.

''There aren't too many new indexes they can add to their family without, as [Vanguard chief investment officer] Gus Sauter has referred to it, slicing the baloney too thin," Wiener said.

Franklin chief executive John Cone, who has had Vanguard's business since 1986, said quantitative funds also reduce risk compared to other methods. ''A lot of traditional managers do a superb job, but their year-over-year results tend to be more volatile," Cone said. ''Part of the appeal of the quant managers has been the risk control they bring."

''The people hiring the managers have a certain career risk of their own if they hire someone who blows up," Cone said.

Cone advises Vanguard on two funds, Growth & Income, and Morgan Growth, but doesn't control either fund entirely. That's not unusual. Vanguard tends to mix up advisers with different investment styles in the same funds.

This strategy also shows up in Vanguard's Global Equity fund, for instance, which invests in a mix of large company stocks worldwide. Over the past five years it has returned about 15 percent, or 5 percent better than the benchmark used by Morningstar.com, a Chicago mutual fund analysis firm. The fund's manager since 1995, Jeremy J. Hosking, works for Marathon Asset Management in London.

The funds' performance has trailed a Morgan Stanley benchmark for foreign stocks in more recent periods, according to Morningstar.com. Vanguard says Morningstar is using the wrong benchmark since Global Equity invests in US stocks as well, and by its calculations the fund has beaten its benchmore recently, as well.

In any case, in 2004 Vanguard brought in Acadian, the Boston quantitative shop, and began directing new investments to the fund to Acadian's control.

Whereas Marathon has pursued a contrarian approach to investing and has been selling off stakes in energy and emerging markets, Acadian has been buying up both areas and tends to buy and sell stocks more rapidly.

Vanguard won't provide figures for the performance of each manager. But John Chisholm, Acadian's chief investment officer, and now a co-manager of the Global Equity fund, says the combination of the two approaches amounts to a diversification for the average investor who is only likely to have one global large-cap fund in their portfolio.

Chisholm said he's never met Hosking and doesn't need to. ''They're good at what they do, we think we're good at what we do," he said.

Ross Kerber can be reached at kerber@globe.com.