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Investors Are Going the Wrong Way on These Funds

Six good funds are hit with outflows, but three small good funds are seeing inflows.

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Generally, investors are going in the right direction. They are buying well-run low-cost funds and selling high-cost failures. But that’s not always the case. Investors also tend to lean too heavily on short-term performance. There are some funds where you should not follow the crowd.

I found very good funds with poor three-year returns, and some mediocre funds with strong three-year returns. A three-year figure tells you more about luck than skill, yet fund flows imply that it’s really all skill. But that’s something you can use to your advantage. I looked at funds whose one-year organic growth rates (net flows as a percentage of assets at the beginning of the year) signal that investors are headed in the wrong direction.

Keep the Faith in These Funds

Where the Crowd Is Right

Sometimes the trend does go in the right direction. I flipped the tables by looking for funds with the highest organic growth rates that are also Morningstar Medalists. Many of those that turned up on the list have pretty small AUM, so I’m not worried about them getting swamped. Still-small

Brian Schaub and Chad Meade, managers of Bronze-rated

We’re on board with sending more money to

Silver-rated

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About the Author

Russel Kinnel

Director
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Russel Kinnel is director of ratings, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He heads the North American Medalist Rating Committee, which vets the Morningstar Medalist Rating™ for funds. He is the editor of Morningstar FundInvestor, a monthly newsletter, and has published a number of prominent studies of the fund industry covering subjects such as manager investment, expenses, and investor returns.

Since joining Morningstar in 1994, Kinnel has analyzed virtually every type of fund and has covered the most prominent fund families, including Fidelity, T. Rowe Price, and Vanguard. He has led studies on the predictive power of fund data and helped develop the Morningstar Rating for funds and the Morningstar Style Box methodology. He was co-author of the company's first book, Morningstar Guide to Mutual Funds: 5-Star Strategies for Success (Wiley, 2003), and was author of the book Fund Spy: Morningstar's Inside Secrets to Selecting Mutual Funds That Outperform, published in 2009.

Kinnel holds a bachelor's degree in economics and journalism from the University of Wisconsin.

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