7 unloved funds to embrace
On the outs
Each year Morningstar looks at the equity categories that have experienced the greatest outflows and inflows to gauge which areas are unloved or overheated. The idea: To use fund flows as a contrarian indicator, buying into categories that have seen investors leaving in droves while trimming exposure to those that are demand.
Morningstar has followed this strategy since the early 1990s, using annual net cash flows to identify each year's three most unloved and loved equity categories. We track the average returns for those categories for the subsequent three years. We've found that holding a portfolio of the three most unpopular equity categories for at least three years is an effective approach: From 1993 through 2012, the "unloved" strategy gained 8.4% annualized to the "loved" strategy's 5.1% annualized. The unloved strategy has also beaten the MSCI World Index's 6.9% annualized gain.
The most unloved equity categories are also the most unpopular overall: large growth (outflows of $39.5 billion), large value (outflows of $16 billion), and large blend (outflows of $14.4 billion). Here are some top-performers within those groups.
(Source: Morningstar; Author: Katie Rushkewicz Reichart, CFA and senior fund analyst on the active funds research team with Morningstar)