Morningstar says that funds from so-called “unpopular” categories – designated because of high fund outflows during a year – have beaten the average equity fund during the following three years more than 75% of the time – and have beaten the so-called “popular” funds more than 90% of the time.
Morningstar first introduced the study in 1996, after tracing fund flows back to 1987.
“We put aside performance measurement and focus instead on how redemptions from a given fund type can often predict a performance rebound,” Morningstar’s Christine Benz said in a statement. “Buying one fund from each of these categories and sticking with them for a few years has been a profitable investment for those who have the patience and willpower to handle contrarian investing.”
This year’s investor outcasts by fund categories include, according to Morningstar:
- Latin America funds got no love from investors for the second straight year, thanks to concerns over Brazil’s political and economic volatility and continued instability in Argentina and Venezuela
- The blow-ups of high-profile utility companies, combined with the declining fortunes of many telecommunications concerns, kept investors far away from utilities funds in 2002
- Many funds in the financials category felt the sting of exposure to money-center banks, asset managers and brokerages. As their earnings sunk, investors jumped ship.
Morningstar also offered tips on how best to implement its “Unloved Funds” findings:
- Not every downtrodden category will rally during the next three years, so a small stake in each group can make the difference.
- Investors cannot expect immediate gratification with this strategy.
- Unpopular categories often dabble in highly volatile markets, so an investor’s exposure to these funds should not account for more than 5% of a portfolio.