Morningstar Releases 'Unloved Funds' Report

Morningstar’s ninth annual “Unloved Funds” survey found that stock-fund categories with the past year’s greatest outflows in percentage terms usually beat the average equity fund over the following three years. Most popular categories of the year usually underperform over the same time period, according to a news release from the company.

“Fund flows tend to follow recent performance, but investors buying into sectors that have already been bid up are unlikely to uncover many bargains,” explained Russel Kinnel, editor of Morningstar FundInvestor, in the news release. “The ‘Unloved Funds’ study is our way of illustrating which categories may be attractive. If investors adopt a contrarian style of investing — even if it is only a small part of their portfolios – they may find better results than if they simply followed what others are doing.”

In 2004, the most “unloved” fund categories were:

• Utilities, which after two years of being unloved, performed very well in 2004.
• Financials, which returned more than 13% in 2004, with investors still avoiding the funds.
• Technology, which for the first time since 1993 made this list.

In 2004, the most popular fund categories were natural resources, Japan, and world allocation funds, according to the company.