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Buy the Unloved 2015

Going against the grain of flows can be a profitable strategy.

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This article was published in the January 2015 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

Our annual "buy the unloved" strategy points you to unpopular Morningstar Categories that may be due for a rebound. Historically, it has pointed to more winners than losers. The idea is to buy funds from the three unloved categories and sell three from the loved. You then hold the unloved for three to five years. Starting from 1993 and rolling it forward, the strategy returned an annualized 10.3% for unloved funds versus 6.4% for loved funds. I wouldn't suggest making wholesale portfolio changes, but rather make these changes at the margins or simply use this as a guide for where to shop or what to avoid when looking for new funds.

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