3 High-Yielding Fund Picks for Contrarian Investors

Confounding many market experts, Treasury yields have remained stubbornly low even as stocks have rallied back following the Brexit vote. Investors seem to be betting that even if the Federal Reserve takes action to raise rates later this year, it won't act aggressively to do so. That means that yield-starved investors are going to need to venture beyond the realm of high-quality bonds if their goal is to wring out a positive real yield.

Because yield is so scarce these days, it also means that every rock has been turned over in search of it. That helps explain the recent rallies in junk bonds, emerging-markets credits, and senior loans; investors are looking for returns wherever they can find them. As a money manager friend recently put it, anything with upside in the current market "has a little hair on it." (I know. Ew.)

To help identify such ideas for income-seeking fund investors who are willing to take some risks, I turned to Morningstar's Premium Fund Screener. I screened for medalist funds with SEC yields of 4% or higher, homing in on 4% because it's often considered a "safe" starting spending rate for retirees. (Note that the 4% research doesn't distinguish between income distributions and withdrawals of capital; both methods of extracting cash flow count as spending.) To further winnow down that universe to the subset of funds with returns that have been under a bit of a cloud lately--and may look better in the future--I looked for those whose three-year returns rank in the bottom quartile of their categories.

The screen turned up three funds as of July 12, 2016: a pure foreign-stock fund, a tactical asset allocation offering, and a world-bond fund. A unifying theme among the three--while they operate in different investing realms--is that they're all bold, counterpunching funds that aren't content to go where the crowd is. Premium users can click

to view the screen or tweak it to suit their specifications. (For example, I didn't exclude advisor-sold offerings, but DIY investors will likely choose to do so.) Here's a closer look at the three funds that made the cut.

Category: Foreign Large Value

Analyst Rating: Gold

Foreign stocks currently feature lush dividends relative to their U.S. counterparts. Of course, that's not without justification, as slumping security prices push up yields. European banks, a major source of dividends overseas, are fighting for viability and have taken a beating, and the slowdown in emerging-markets growth has cast a pall over many developed foreign markets, too. Those problems aren't likely to go away overnight, but this fund's penchant for contrarian plays makes it an interesting contrarian idea itself. Nearly three fourths of the current portfolio lands in Europe and the U.K.--not surprising given that management has usually tread lightly in emerging markets--and deeply unloved picks such as Volkswagen have dragged on results. Yet senior analyst Kevin McDevitt lauds management for its consistent application of its long-term, valuation-conscious strategy. McDevitt also views its highly experienced team as a key asset: Sarah Ketterer and Harry Hartford have been running foreign-stock assets together for nearly two decades. Investors venturing into this fund should bear a few items in mind, however. First, dividends from foreign stocks held inside of a retirement account will be reduced by the foreign taxes paid on those distributions, but the account holder won't be able to take advantage of the foreign tax credit she receives to offset those taxes, as discussed

. (That's not necessarily a reason to avoid foreign dividend payers in a tax-sheltered account, but it is something to be aware of.) Second, it's worth nothing that a broad swath of foreign stock funds, including some index funds and exchange-traded funds, have robust yields today; for example, funds and ETFs that track the MSCI EAFE currently have yields north of 2.5%.

Category: Tactical Asset Allocation

Analyst Rating: Bronze

This go-anywhere fund has enjoyed a very strong resurgence thus far in 2016; its year-to-date gain of 11% places in the tactical asset allocation group's top 10%. But it still has a way to go to atone for its abysmal run from 2013 through 2015, and its results have fallen short of the fund's self-professed goal of beating CPI by 6.5 percentage points over a full market cycle. Over the past few years, manager Rob Arnott's unwavering emphasis on emerging-markets equities and debt dragged down results as growth in such markets slowed. Arnott’s focus here is on high-yielding assets with attractive valuations, a quest that has led him to hold emerging markets debt, inflation-protected bonds, and alternative investments, to name a few. He also has the latitude to employ shorts and relies on PIMCO's funds to populate the portfolio. Analyst Jeff Holt notes that Arnott's use of leverage is the portfolio's most distinctive trait; while leverage could spell trouble in a liquidity crunch, Holt believes Arnott has used it responsibly thus far.

Category: World Bond

Analyst Rating: Silver

Senior analyst Karin Anderson notes that this fund takes on even more risk than sibling