(PUB) Investing 2016

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Buy the Unloved The Contrarian | Russel Kinnel

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

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

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.