Understanding the benefits of quantitative investing

A growing number of investors are looking for advanced strategies to build wealth, keep risk under control and meet their financial goals. For many of these investors, a methodology known as quantitative investing is becoming increasingly popular. "Investors are recognizing that quantitative strategies have worked extremely well over time," says Ted Truscott, Chief Investment Officer of RiverSource Investments, a subsidiary of Ameriprise Financial, Inc.

Quantitative investing is an investment approach leveraged by professional portfolio managers that uses cutting-edge mathematics to identify patterns among decades' worth of stock prices and other financial market data. Their ultimate goal is to find investment strategies that may have been successful in the past and may be likely to keep working in the future; then, use that knowledge to help consistently outperform the market. For example, they might examine the past 50 years' worth of stock returns and learn that stocks of companies with strong earnings relative to their market capitalizations — the total value of a company's stock — consistently outperformed other shares during that time. They would then try to find stocks with those characteristics in today's market and buy them.

This is a fundamentally different approach than most investors use. For example, a typical investor might try to size up a company and its stock by examining current financial statements, then form an opinion about the firm's future prospects by evaluating the quality of its management, customers and competitors. In contrast, quantitative investing is based entirely on data and facts — the hard numbers.

Quantitative investing offers several potential advantages to investors:

• Unemotional investing. Most investors focus on the qualitative and subjective aspects of an investment — the perceived strength of a management team, for example — which makes them susceptible to emotional biases that can cloud their judgment about a company and its stock. As a result, they might misinterpret information and make mistakes. Quantitative investing, by contrast, uses logic and historical facts when making decisions, avoiding the emotion-based investment mistakes.
• Discipline. A quantitative approach is repeatable, helping to ensure consistent investment decisions from day to day. "Quantitative computer models have strict rules that essentially say, "This is how we select investments and we won't violate that," says Dimitris Bertsimas, senior portfolio manager with RiverSource. His team manages a variety of funds, including the RiverSource^® Strategic Allocation Fund, by applying this unique methodology.
• The potential for market-beating returns. By crunching decades' worth of stock returns and other financial data using powerful technology, quantitative investing seeks to identify investment strategies that made money in the past and that have qualities indicating their likely success going forward. This may give quantitative investors the potential to consistently deliver returns above those of a benchmark index.
• Lower volatility. Quantitative investing often uses several computer models that seek out companies with various risk characteristics. For example, one model might identify stocks that are currently performing well, while another might find shares that have recently underperformed but are poised to rebound. Combining these two types of stocks in a portfolio may enhance its overall diversification* and reduce volatility — when one investment is lagging, the other may be climbing. "Quantitative investors make risk management a more active part of their strategy," notes Truscott.

To see these principles in action, consider the quantitative approach that Bertsimas' team employs in three crucial areas of investing:

• Asset allocation. How you spread your assets among major categories (such as stocks, bonds and cash) can largely determine your returns over time. The team employs two quantitative computer models to make advanced asset-allocation decisions for its portfolios. One seeks asset classes with improving investor sentiment, while the other selects asset classes that are currently out of favor and, therefore, attractively valued. Working together, these models help increase diversification, reduce volatility and may generate more consistent returns.
• Stock selection. Once the asset classes are selected, the group uses three computer models to create a portfolio of stocks. One model seeks to identify undervalued shares, while another looks for stocks with rising prices. The third focuses on companies with solid features of quality, such as stable earnings and low debt. Such firms, says Bertsimas,"hold up much better when the markets stumble, and their inclusion helps us perform well on a relative basis in challenging environments."
• Portfolio enhancement. The team then builds a portfolio using stocks selected by the three models. This process involves proprietary technology that helps ensure a well-diversified portfolio with the ideal exposure to a variety of companies, industries, investment styles and other factors. The upshot: Quantitative investing offers tremendous potential capabilities when it comes to your most important financial goals — from allocating assets to potentially enhancing performance and managing risk. Indeed, with its disciplined and data-driven approach, quantitative investing can serve as a unique and effective component of successful investing.

Quantitative investing is a sophisticated method of investment selection. Your Ameriprise financial advisor can help you consider the potential risks and advantages of this strategy.

For a free RiverSource prospectus, which contains this and other important information about RiverSource^® funds, call (888) 791-3380 (toll free). Read the prospectus carefully before investing.