‘Unloved’ funds might be right pick for you
By Gail MarksJarvis
Published: Sunday, March 3, 2013, 9:00 p.m.
Updated: Sunday, March 3, 2013
It's IRA time, with people opening individual retirement accounts after doing their tax returns, then fretting over where to invest the money.
Some labor over the decision, figuring there is one right fund. Yet if you already have a balanced mixture that invests in the total U.S. stock market, a diversified international fund and a bond fund, and want to add some spice, you might want to pick a fund that disgusts you.
Yes, you read that right. I'm talking about picking an ugly fund, one that people haven't wanted to touch for the past three years.
Typically, people figure the way to make money is to go with the fund that's been bestowing wealth and winning the hearts of investors lately.
But the truth is that stocks and funds run in cycles. They are sweet for a while, then turn ugly, and eventually become darlings again after no one has wanted to touch them.
So a strategy suggested by Morningstar since 1994 is to choose what it calls “the unloved.” That means picking a type of fund that has been snubbed in the marketplace.
I'm not talking about a fund with a lousy manager. Those funds tend to stay lousy. And I'm not talking about a fund that has such high fees that investors never make as much money in them as they would in a cheaper fund.
Rather, I am talking about a fund that invests in a certain category, one most people consider unpopular at the time. In the mid-'90s, such a category was gold. When Morningstar suggested buying the unloved precious metal funds of 1995, the idea sounded ridiculous. No one wanted to touch the stuff. For years, gold had been a loser. Then in 2000, gold started to win favor with investors, and by 2008 it was clearly becoming beloved. A few years later, it was the darling of investors, and the SPDR Gold Trust fund became one of the most popular funds sold.
As Morningstar has studied its “unloved” strategy, however, it has found that unpopular funds can be detested for a long time, sometimes years. So the firm's analysts suggest that people buy only a little and that they simultaneously invest in the three most unpopular categories from the past three years. Together, each year's three unloved funds have gained, on average, 8.4 percent a year from 1993 through 2012, Morningstar's Katie Rushkewicz Reichart said. That's compared with a 6.9 percent average annual gain in the MSCI World Index, an index that reflects the stocks of the world in aggregate.
Note that you don't pick the trio based on how awful their returns have been for three years. Rather, you pick them based on how much people have come to detest them, indicated by investors leaving in droves.
So the unloved group that you would buy this year would include a large-cap growth fund, or a fund that picks stocks of large companies with fast growth — companies such as Apple — and a large-cap value fund, or a fund that picks large companies that are cheaply priced. In addition, you would pick a large-cap blend fund, or a fund that picks a variety of large companies, some fast growers and some that are more sluggish, but all with cheap stock prices.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of “Saving for Retirement Without Living Like a Pauper or Winning the Lottery.” Readers may send her email at firstname.lastname@example.org.
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