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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 re-
silient. 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 category and go
the opposite direction.
The strategy says you buy funds in the three most re-
deemed 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 invest-
ment 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.
At this point, we don’t have data through Decem-
ber, so I’ve used figures through November. I will post
an update to the
FundInvestor
website as soon as
we have final year-end figures. The figures include
open-end funds and exchange-traded funds.
The unloved categories for
2015
are pretty similar to
last year’s: large blend, large value, and large growth.
That was a good signal last year as large caps beat
small caps, and large growth was particularly strong.
In
2015
, people were still fleeing U.S. large caps
despite a healthy economy and a great bull market.
I shared some large-value ideas in the cover story,
so here are some large-blend and large-growth ideas.
Vanguard Total Stock Market
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, con-
sider
Oakmark
OAKMX
and
AMG Yacktman
YACKX
.
Both have excellent stock-pickers with the potential
for tremendous outperformance.
T. Rowe Price Divi-
dend 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 funds,
but you know that, so here are three non-Primecap
funds 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
River-
Park/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.
Sell the Loved
On the flip side, foreign large-blend, Europe, and health-
care are the most loved categories. Even though the
U.S. market continues to beat most foreign markets, in-
vestors continue to look overseas. The Europe influx
is particularly interesting. Nearly all the inflows came
into dollar-hedged European
ETF
s, because Europe
has started a program of quantitative easing at the
same time that it was apparent the Federal Re-
serve’s next move would be to hike rates. Thus, inves-
tors interested in Europe were worried that a rising
dollar would kill any gains in equities. (Very few open-
end Europe funds hedge their currency exposure.)
So, I suppose this is a signal to bet against the dollar
as much it is to bet against Europe.
I consider the “Buy the Unloved” strategy a good
guide to contrarian ideas, but I wouldn’t suggest
overhauling your portfolio based on it. You don’t want
to veer from the plan. Just use this strategy at
the margins and as a healthy reality check to make
you reconsider buying the most popular categories
and rethink selling a fund from an unpopular area.
K
Buy the Unloved
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.