The Fund seeks long-term capital appreciation over market cycles with lower volatility than the broad equity market.
The Schwab Hedged Equity Fund employs a long/short strategy to achieve its objective of capturing the performance of the broad U.S. equity market while using active risk-management techniques to minimize volatility. To manage the fund, the portfolio managers use Schwab Equity Ratings®, Schwab's systematic, disciplined approach to stock evaluation that has earned industry recognition for its role in helping to produce superior results. The Fund seeks long-term capital appreciation over market cycles by outperforming the S&P 500® Index1 with a lower level of investment risk.
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Distinguishing Characteristics and Benefits
Different from Market-Neutral Funds
Unlike many long/short funds that are benchmarked against Treasury Bills, the Schwab Hedged Equity Fund is benchmarked to the S&P 500 Index, allowing it to be considered a core portfolio holding. Its long positions–or specific combinations of long and short positions–are designed to provide market-beating performance (alpha), while its shorts–or mixture of longs and shorts–are designed to offer lower volatility (beta).
Two Alphas with Half the Beta
The result of this strategy is that the Fund provides two alphas (from both longs and shorts) with half the risk exposure of the market, creating a portfolio positioned to take advantage of the market's upside potential while managing the downside. Combined with the management team's active investment management philosophy of exploiting market inefficiencies through disciplined research and portfolio construction, the Fund is continually reevaluated and fine-tuned to react to real-time changes within a multi-factor optimized investment model. And unlike many long/short funds that look at the two separately, managers of the Schwab Hedged Equity Fund look at long and short positions together, providing them the capability to more-efficiently manage diversification, risk and beta.
Driven by Schwab Equity Ratings®
The Fund uses Schwab Equity Ratings to aid its stock selection, which represents Schwab's point of view on the 12-month performance outlook for approximately 3,000 of the largest U.S.–headquartered stocks (by market capitalization) using a scale of A through F. It employs a systematic, disciplined methodology that evaluates each stock on the basis of investment criteria from four broad categories: fundamentals, valuation, momentum and risk. Generally, the Fund seeks to establish long positions in stocks that are rated A or B and short positions in stocks rated D or F.
Investment Management Process
The portfolio management team employs a multifactor approach to finding what it believes is the right blend of risk and reward, not only within each individual stock but also with regard to how such stocks fit together to satisfy the investment style and risk profile of the Fund. As such, Schwab Equity Ratings is just one component of stock evaluation; other essential factors also constitute the basis for portfolio construction and optimization. As an actively managed fund, the Schwab Hedged Equity Fund's allocations across sectors and specific holdings will often vary from its benchmark, seeking to capitalize from selected over- and under-weightings based on market and economic considerations.