Unloved Buys for Contrarians

01/30/2014 9:00 am EST


Russel Kinnel

Editor, Morningstar FundInvestor

It's time once more for our annual "Buy the Unloved" strategy. It's a contrarian strategy driven by fund flows. The idea is to buy stock categories with heavy redemptions, explains Russel Kinnel, editor of Morningstar Fund Investor.

Over the past 20 years, it has worked pretty well because it is directing you into cheap assets and out of pricey ones, as flows usually follow hot performers and flee areas with poor returns.

I'm a long-term investor, so I suggest holding a minimum of three years. Typically, the strategy works best in big pivot years and less well when you have extended rallies for one part of the market.

For 2013, the strategy suggested buying large growth, large value, and large blend. The three categories returned 33.9%, 31.2%, and 31.5%, respectively, in 2013. That's pretty good, as US stocks proved to be a winner, though small- and mid-cap stocks did even better.

Fund flows through November show the unloved categories are large growth, precious metals, and natural resources. It's easy to see why precious metals and natural resources saw outflows, as they had a brutal 2013, but as you saw above, large growth was a winner.

Large Growth Ideas

Primecap Odyssey Growth (US:POGRX) is one of the best growth funds you'll find. It charges only 0.67% for a fund that does excellent fundamental research of growth stocks. It's a solid pick for the long haul.

Manning & Napier Equity (US:EXEYX) is a team-run fund with a strong record. The same team of managers runs all of Manning & Napier's funds, blending top-down and bottom-up analysis to drive its portfolios.

T. Rowe Price Blue Chip Growth (US:TRBCX) is a gem run by Larry Puglia, who is in his twentieth year on the fund. Puglia has produced top-quintile returns across the one-, three-, five-, and ten-year periods, without taking any extreme risks.

Jensen Quality Growth (US:JENSX) hits, both the unloved button, and the quality emphasis that GMO suggests. It's a patient large-cap high-quality fund run by an experienced team out of Portland, Oregon. The fund generally holds up better than its peers in downturns, so it's got defensive appeal.

Precious Metals Idea

With a 47.8% loss in 2013, Oppenheimer Gold & Special Minerals (US:OPGSX) is the epitome of unloved. The fund is fairly aggressive and therefore tends to have big rallies and big drops. A good fund, but please use in moderation.

Natural Resources Ideas

RS Natural Resources (US:RSNRX) is a little like the above Oppenheimer fund in that it, too, has extremes. It lost 47% in 2008 and gained 49% in 2009. Mackenzie Davis and Ken Settles look for low-cost producers, but that obviously doesn't make for a smooth ride.

iShares Global Materials (MXI) is a low-cost but high-risk way to play various mining, chemicals, paper, and construction materials companies. If the global economy grows quickly, it likely will do well. Obviously, this is not a core holding.

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