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Our annual “buy the unloved” strategy points you to
unpopular categories that may be due for a rebound.
Historically, it has pointed to more winners than
losers.The idea is to buy funds from the three unloved
categories and sell three from the loved. You then
hold the unloved for three to five years. Starting from
1993
and rolling it foward, the strategy returned an
annualized
10
.
3%
for unloved funds versus
6
.
4%
for
loved funds. I wouldn’t suggest making wholesale
portfolio changes, but rather make these changes at
the margins or simply use this as a guide for where
to shop or what to avoid when looking for new funds.
Although the strategy has done well over the long
haul, last year’s picks are in a pretty big hole. Large
growth was a great spot to invest, but the other
two Morningstar Categories were precious-metals
equity and natural-resources equity. Ugh.
Through November, the three most redeemed equity
categories were large growth, mid-growth, and
small growth. That’s interesting, given that large
growth was quite strong and even mid-growth
had pretty good returns. Nonetheless, all three still
have appeal. I don’t want to push my luck with
large growth, so I’ll focus on funds with Morningstar
Risk ratings that are Below Average.
Jensen Quality Growth
JENSX
is probably the most
contrarian option as high quality has been out of favor
in recent years. The managers seek out companies
that have produced returns on equity of at least
15%
for the past
10
years. Then they do discounted cash
flow models and look for companies trading at a
discount to their value. The result is a group of high-
quality brand names with modest growth, such as
PepsiCo
PEP
,
3M
MMM
, and
Accenture
ACN
. The
fund holds up nicely in downturns but tends to have
pedestrian results in rallies.
Fidelity Contrafund
FCNTX
is more aggressive than
the Jensen fund, but Will Danoff has been a very
able manager in all environments. With an enormous
asset base to command, Danoff invests more money
in more companies than you might think possible to
own while still producing good results. And he just
keeps going and going. Danoff looks for companies
with great products and strong management and
aims to get ahead of the trend on both. He loves to
attend meetings with company management,
and of course scores of them come through Fidelity’s
offices every day.
American Funds AMCAP
AMCPX
has been run
with a steady hand over the years. Run by five
managers and a pool of analysts, the fund looks for
companies with competitive positions, above-
average growth, and shares trading at modest valua-
tions. (Today, there are
142
stocks in the portfolio
and a distinct health-care bias.) What’s impressive is
the consistency of performance. The fund has
outperformed in eight of the past
10
years and held
up quite well in down markets in
2008
and
2011
.
Mid-Growth
Vanguard Mid Cap Growth
VMGRX
is a cheap way
to get your mid-growth exposure. Assets are split
between subadvisors Chartwell Investment Partners
and William Blair. Ed Antoian of Chartwell and
Robert Lanphier
IV
of William Blair have been with
the fund since
2006
. Since they came on board, the
fund has matched the Russell Midcap Growth Index
while beating peers by about
200
basis points a
year. The fund hasn’t yet lagged peers by a meaningful
amount in any single year, while its years of outper-
formance, including
2014
, have often been by margins
of
300
basis points or more.
FPA Perennial
FPPFX
remains a strong pick even
though one of its longtime managers has retired.
Steve Geist stepped down at the end of
2014
, but Eric
Ende and recently promoted analyst Greg Herr are
a good bet to keep things going. The strategy focuses
on companies with a competitive advantage and
low debt. It takes big bets in steady but boring growth
businesses like
O’Reilly Automotive
ORLY
,
Signet
Jewelers
SIG
, and
Knight Transportation
KNX
.
Buy the Unloved 2015
Morningstar Research
|
Russel Kinnel