Utilities, Financials Find Places on '03 'Unloved Funds' List

January 20, 2004 (PLANSPSONSOR.com) - Looking to find a diamond in the mutual fund rough, Morningstar has pulled the cover back on its 8th annual "Unloved Funds" report.

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.   Additionally, this group has 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.

“Going against the crowd is seldom easy. It requires patience and long-term thinking, but that is true of just about any successful investment strategy,” said Russel Kinnel, editor of Morningstar FundInvestor . “The historical results of our study show that such a contrarian stance can often be rewarding.”

This year’s investor outcasts by fund categories include two repeats from 2002’s list (See   “Jilted” Funds Fare Well: Morningstar):

  • Utilities – being unloved and underperforming kept investors far away from utilities funds again in 2003.
  • Financials –many funds in the financials category felt the sting of exposure to money-center banks, asset managers and brokerages.Although they were strong bets during the recession, these funds did not dazzle investors during the market rebound and have instead been upstaged by better-performing funds for the second straight year.
  • Communications – this sector has been humbled by mountains of debt, overcapacity, and brutal competition. The sector rebounded in 2003, but long-term investors still lost money during the past three to five years.

 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.