Funds that rely on quantitative analysis typically thrive immediately before and after sharp shifts in market sentiment. Although we usually steer clear of quantitative funds because of their opaque strategies, we screened the universe for interesting options. In the process, we came across this surprisingly attractive offering from Charles Schwab.

Managers Larry Mano and Vivienne Hsu have plenty of experience with quantitative (quant) funds, overseeing Schwab’s five offerings in this area. The one that caught our eye is Schwab Core Equity (SWANX).

The fund relies on the firm’s Equity Ratings platform, a computer model that assigns a weekly grade to the 3,000 largest US stocks. The model considers four qualities: fundamentals, valuation, momentum and risk. Mano and Hsu make their portfolio selections primarily from equities rated ‘A’ or ‘B.’

In the fundamentals category, the model examines earnings growth and its drivers. For instance, if a company’s earnings and cash flow are on the rise, but inventory is building up in the warehouse, earnings may not be sustainable over the long term. This situation would result in a lower grade.

On the valuation front, the model digs even deeper.

In addition to traditional metrics such as price-to-earnings and price-to-cash flow ratios, the program considers short interest and insider buying and selling.

The rationale behind this decision is simple: Insiders and short-sellers are often better informed about a company’s situation than the average retail investor. Accordingly, the model assigns higher ratings to companies that are buying back stock or are seeing heavy insider buying and don’t have high short-interest ratios.

In the momentum category, the model evaluates shifts in analysts’ earnings estimates. That is, a stock that trades at low valuations likely will appreciate if most analysts are increasing their estimates.

The final category, risk, weighs a company’s overall health and stability by measuring factors such as earnings volatility. Not surprisingly, larger companies usually earn a higher rating in this category.

Because the size of the stock universe doesn’t change, the number of names in each grade level also holds constant. The model always doles out an ‘A’ rating to 150 stocks; 750 names always receive a ‘B’; and 1,200 are assigned ‘C’ ratings. Given the criteria that underpin these grades, three-quarters of the A-rated companies tend to be large- and mid-caps.

But the managers of Schwab Core Equity don’t just blindly trade the 100 top-rated stocks based on the output of a black box; management adjusts the portfolio to ensure that the fund is diversified amongst the various sectors. And although the S&P 500 serves as a template, Mano and Hsu don’t rely exclusively on this model when determining portfolio allocations.

Depending on which sectors the model favors, management will overweight or underweight individual groups by up to 5 percent. To ensure maximum flexibility, management recent loosened the sector definitions to deviate from those of the S&P 500.

Management also has a bit of wiggle room on sell decisions. Although the majority of stocks that find their way into the fund start out with ‘A’ ratings, grades often shift over time. But rather than selling a stock as soon as its rating changes, management will hold on until the upside has passed.

That Mano and Hsu don’t rigidly adhere to their black-box methodology limits the turnover rate to 41 percent and makes it surprisingly tax efficient for a quant fund.

This flexibility has also enabled the fund to outperform in periods of rapidly changing market sentiment—a challenging environment for most quant funds.

Schwab Core Equity strongly outperformed during two key market turns, ranking in the top 19 percent of its category in 2002 and the top 14 percent in 2008.

Although the fund tends to outperform in down markets, it sometimes lags the pack when the bulls work up a head of steam.

Despite our general misgivings about funds that use quantitative strategies, Schwab Core Equity is an excellent choice if you’re looking to add an alternative strategy to your portfolio.

Not only does management apply a consistent and comprehensible strategy, but, at 0.75 percent, the expense ratio is extraordinarily low relative to its peers. Add in the fund’s solid long-term track record, and you have an excellent vehicle for adding some alpha to your portfolio.