3 Most Hated Funds

Russel Kinnel: Selling an investment is always harder than buying it. We generally buy when everything looks great, but when things head south, it’s not so easy to figure out if you should sell. It helps if you write down reasons to buy and sell even before you make your investment. What role is a fund filling in your portfolio? Does your thesis still hold up? These ideas can help to guide you to the right answer.

Today, I’m going to look at three funds that a lot of people are selling. These are funds that are facing heavy redemptions for the year to date and the trailing 12 months.

3 Most Hated Funds

1. American Funds EuroPacific Growth AEPGX
2. Invesco Developing Markets ODMAX
3. Lord Abbett Short Duration Income LLDYX

First up is American Funds EuroPacific Growth. We rate the A shares Silver, so obviously we think the fund still has long-term potential. American Funds has a seasoned team of managers and analysts and reasonable fees. Yet, the fund saw $8 billion go out in the first half of the year and $16 billion in the past 12 months. Performance has been middling in recent years even though the long-term numbers are still solid. In 2021, a shift to value dropped the fund to the bottom quartile of its category, and in 2022 the fund’s losses were in line with the category benchmark and a little bit better than peers. So far this year, the growth rally has the fund up about 200 basis points ahead of the benchmark but in line with peers. In short, a middling stretch but not really a big concern. It’s performing about how we’d expect, and the case for the long term is still solid.

Next, we’ve got Invesco Developing Markets, which has shed $2 billion this year and $7 billion over the past 12 months. Recent performance has pretty much stunk, so it’s easy to understand why people are selling. In 2021, the fund got burned by Chinese education stocks, and in 2022, it was an overweight to Russian stocks. This year a growth rally has the fund back in the saddle with returns that are about double the category benchmark. The fund has clearly made some mistakes, but we have a Bronze rating on the A shares because Justin Leverenz’s bold strategy usually pays off. I have a relatively small investment in the fund, too.

Third up is Lord Abbett Short Duration Income. The fund actually has decent three-year numbers, but investors did not appreciate the bumpy ride to get those. Investors pulled about $3.5 billion out in the first half and $9 billion over the past 12 months. Many people treat short-term bond funds as near money markets, but when you buy a fund that has an outsized yield, you have to be ready for some outsized losses. The fund lost more than its peers in the COVID-19 correction of 2020, and in 2022, it lost about 4.5%, which was in line with peers but still not welcome. In addition, the expected end of rate hikes has led an industrywide shift out of short-term bonds and into intermediate-term bonds as investors are less worried about interest-rate risk. We rate the fund’s shares either Neutral or Negative depending on the fees because the fund’s aggressive strategy is really too much for many investors to handle. We’re seeing that play out right now as investors bail on the fund.

Watch “3 Funds for a Bull Market” for more from Russel Kinnel.