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Fund Spy

Buy the Unloved, 2010 Style

It pays to go against the grain.

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If chasing hot performers hasn't gotten you very far, consider doing the opposite.

Categories with the greatest inflows tend to underperform and those with the greatest outflows tend to outperform. Net flows tend to be driven by past returns, so, in effect, they are telling you what areas have gotten relatively overpriced and underpriced. If the market and fund investors were perfectly efficient and logical, flows and prices would only adjust so that everything had a similar potential risk/reward profile.

However, markets and fund investors generally overdo things in both directions, as the markets of the past two years illustrate vividly.

Russel Kinnel has a position in the following securities mentioned above: DODFX, AWSHX. Find out about Morningstar’s editorial policies.