Hey! Contrarian Investors, Buy The Unloved 2016 by Russel Kinnel, Morningstar
Picks in three categories for the contrarian investors.
It’s time for our annual “Buy the Unloved” report.
This is a strategy that we have tracked for more than 20 years, and it has proved to be surprisingly resilient. It’s really a pretty basic contrarian strategy driven by mutual fund flows. The idea is to look at calendar-year mutual fund flows by Morningstar Category and go in the opposite direction.
The strategy says you buy funds in the three most redeemed categories and sell funds from the three most heavily purchased, then hold on for three or five years. Both time periods work well. Essentially, you use flows to point you to the most undervalued investment classes. Going back to 1994, the unloved have beaten the loved in all but one three-year period. On average, the unloved have beaten the loved by 377 basis points annualized.
I use flows for open-end funds and exchange-traded funds, but exclude funds of funds. The unloved categories for 2015 are pretty similar to those for 2014: large blend, large growth, and large value. That was a good signal last year, as large caps beat small caps, and large growth was particularly strong.
Here are a few good choices in each of the unloved categories.
Vanguard Total Stock Market Index (VTSAX) is one of the best low-cost options, and it can simplify investing given how widely dispersed the portfolio is. If you are looking for a more contrarian active strategy, consider Oakmark (OAKMX) and AMG Yacktman (YACKX). Both have excellent stock-pickers with the potential for tremendous outperformance.
- Rowe Price Dividend Growth (PRDGX) plays the role of Goldilocks here with a still active but milder strategy of investing in companies with solid growth prospects and healthy balance sheets that are capable of boosting dividend payouts.
For large-growth funds, I always plug Primecap, but you know that, so here are three non-Primecap funds that are well worth a look. T. Rowe Price Blue Chip Growth (TRBCX) is a real gem. Veteran manager Larry Puglia seeks out companies with high returns on capital and sustainable earnings. He’s used that strategy to produce pleasingly consistent performance. A more contrarian-focused play would be the small RiverPark/Wedgewood (RWGFX) run by David Rolfe. Rolfe has a good long-term track record, but his energy holdings have held the fund back lately.
If you want a growth fund that can play defense, consider Jensen Quality Growth (JENSX). The fund buys high-quality companies that tend to hold up well in recessions.
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