Buy the Unloved 2011
Large-cap U.S. is the contrarian play.
Large-cap U.S. is the contrarian play.
Each year we let you know where the Buy the Unloved strategy suggests you should invest. The idea is to buy funds from the three least-popular equity categories and sell those from the three most-popular. Popularity is determined by fund flows for the prior calendar year.
Holding the unloved funds for three to five years and selling or trimming the loved for that same period have yielded strong returns over the years. However, the results are lumpy. They work beautifully when there's a dramatic pivot year like 2008 or 2009, but they lag in years when category performance is more consistent. This indicates a couple of things. First, you need to stick with the strategy for a while. Second, this is something to do at the margins of your portfolio rather than at the center.
So, how did the strategy perform? From the beginning of 1994 to the end of 2010 , the unloved earned 308% cumulatively or 9% annualized. That's far better than the loved, which earned 157% cumulatively or 6.1% annualized. The MSCI World Index returned 4.6% annualized, and the S&P 500 returned 8% annualized.
This year's unloved categories are large growth (outflows of $45 billion), large blend (outflows of $17 billion), and large value (outflows of $4.5 billion). The loved are diversified emerging markets (inflows of $28 billion), foreign large blend (inflows of $18 billion), and commodities broad basket (inflows of $4.2 billion). Below I have selected some of the best actively managed and passively managed funds for playing the three unloved categories. Among active options, because the strategy is really a bet on an undervalued asset class, I opted for funds that are fairly straightforward and not among the quirkiest of options. I pointed out a couple of months ago that exchange-traded funds are a great way to play the unloved. For ETF picks to play the unloved, check out our ETF analysts' picks here.
In large growth, I suggest Harbor Capital Appreciation (HACAX) or T. Rowe Price New America Growth (PRWAX) as solid, low-cost actively managed expressions of large growth. Should large growth finally enjoy a strong run, these funds should be in clover. If you want an index fund, consider Vanguard Growth Index Admiral (VIGAX), which has an expense ratio of 0.14%.
Among large-blend funds, I like Vanguard Dividend Growth (VDIGX), which is run by Donald Kilbride of Wellington. I'm also a fan of Longleaf Partners (LLPFX) and American Funds Fundamental Investors (ANCFX). On the passive side, Vanguard Total Stock Market Index (VTSAX) is the way to go.
In large value, Dodge & Cox Stock (DODGX) and T. Rowe Price Equity Income (PRFDX) are outstanding, dependable, low-cost actively managed funds. The former is a little more wide ranging, while the latter is anchored to big dividend-paying stocks. Vanguard Value Index (VVIAX), which has a low 0.14% expense ratio, is among the cheapest ways to bet on large value.
FundInvestor Newsletter | ||||
Morningstar FundInvestor is a 48-page newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for | greater gains. This one-year subscription consists of 12 monthly issues, a Reader's Guide, and four free investing reports. Learn more. | |||
$129.00 for 12 Print Issues | $119.00 for 12 PDF Issues | |||
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.