As Valentine’s Day nears, some advisors and investors may want to take a “romantic” look at funds, says Morningstar’s Russell Kinnel.
Each year, the group’s director of manager research reviews fund flows and puts together an “unloved,” or unpopular, list of fund categories. Investors then can add funds from three unloved categories with the greatest outflows in the prior year, since they may be due for “a rebound”; likewise, the strategy involves selling funds in three “loved” categories, which had the largest inflows in the prior year and “may be overheated,” according to Kinnel.
“This is a strategy that we have tracked for more than 20 years, and it has proved to be surprisingly resilient,” he stated in a recent online report. “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.”
But you can’t love ‘em and leave ‘em, the analyst points out: “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.”
Staying in the relationship for several years, Kinnel argues, produces positive results. “Since 1994, unloved categories have beaten loved categories in all but one three-year period. On average, the unloved have beaten the loved by 377 basis points annualized,” he explained.
Which groups top the charts this for being unloved? Large blend, large growth and large value. And which ones need a little less romance? Foreign large blend, Europe and health care.
Going through the unloved groups, Kinnel compiled this list of top picks for investors and advisors to consider:
- Large blend: Vanguard Total Stock Market Index (VTSAX), Oakmark (OAKMX), AMG Yacktman (YACKX) and T. Rowe Price Dividend Growth (PRDGX);
- Large growth: T. Rowe Price Blue Chip Growth (TRBCX), RiverPark/Wedgewood (RWGFX) and Jensen Quality Growth (JENSX).
- Large Value: Sound Shore (SSHFX), American Century Value (TWVLX) and Artisan Value (ARTLX).
The Vanguard Total Stock Market Index Fund, which has a five-star Morningstar rating, is a good low-cost option, according to the Morningstar research director, “and it can simplify investing given how widely dispersed the portfolio is.”
For more active strategies, he points to Oakmark (four stars) and AMG Yacktman (four stars). “Both have excellent stock-pickers with the potential for tremendous outperformance,” Kinnel stated.
The five-star T. Rowe Price Dividend Growth Fund “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,” he adds. Large Growth
In the large-growth group, Kinnel is a fan of Primecap funds, but he also says the five-star T. Rowe Price Blue Chip Growth Fund “is a real gem” thanks to veteran manager Larry Puglia’s ability to find companies with high returns on capital and sustainable earnings.
For a more contrarian-focused play, the fund specialist likes the three-star RiverPark/Wedgewood fund led by David Rolfe, though its energy holdings have held back performance of late.
For a growth fund that can “play defense,” there’s the five-star Jensen Quality Growth Fund, which buys companies that have shown they can hold up well in recessions, according to Kinnel.