Make us your home page
Instagram

Stock tip: invest in 'unloved' funds

It's IRA time, with people planning to open individual retirement accounts after doing their tax returns and then fretting over where to invest the new money.

If you already have a balanced mixture that invests in the total U.S. stock market, a diversified international fund and a bond fund, and want to add some spice, you might want to pick a fund that disgusts you.

Yes, you read that right. I'm talking about picking an ugly fund, one that people haven't wanted to touch for the past three years.

Why? Stocks and funds run in cycles. They are sweet for a while, then turn ugly, and eventually become darlings again. So a strategy suggested by Morningstar since 1994 is to choose what it calls "the unloved," a fund that has been snubbed in the marketplace.

I'm not talking about a fund with a lousy manager or that has high fees. Rather, I am talking about a fund that invests in a certain category, one most people consider unpopular at the time. In the mid '90s, such a category was gold. When Morningstar suggested buying the unloved precious metal funds of 1995, the idea sounded ridiculous. For years, gold had been a loser. Then in 2000, gold started to win favor with investors and, a few years later, it was the darling of investors, and the SPDR Gold Trust fund became one of the most popular funds sold.

As Morningstar has studied its "unloved" strategy, however, it has found that unpopular funds can be detested for a long time, sometimes years. So the firm's analysts suggest that people buy only a little and that they simultaneously invest in the three most unpopular categories from the past three years. Together, each year's three unloved funds have gained, on average, 8.4 percent a year from 1993 through 2012, Morningstar's Katie Rushkewicz Reichart said. That compares with a 6.9 percent average annual gain in the MSCI World Index, an index that reflects the stocks of the world in aggregate.

Note that you don't pick the three based on how awful their returns have been for three years. Rather, you pick them based on how much people have come to detest them, indicated by investors leaving in droves.

So the unloved group that you would buy this year would include a large-cap growth fund, or a fund that picks stocks of large companies with fast growth — companies like Apple — and a large-cap value fund, or a fund that picks large companies that are cheaply priced. In addition, you would pick a large-cap blend fund, or a fund that picks a variety of large companies, some fast growers and some that are more sluggish, but all with cheap stock prices.

Investors holding such funds did well in 2012, earning double-digit gains. But under the strategy, that's not why you buy them. Instead, you select the three because investors haven't wanted them. Last year, investors yanked $39.5 billion from large growth, $16 billion from large value and $14.4 billion from blended funds.

Rushkewicz Reichart suggests these unloved-type funds: LKCM Equity, Vanguard Growth Index, Dodge & Cox Stock and Vanguard Dividend Growth.

Gail MarksJarvis is a personal finance columnist for the Chicago Tribune.

Stock tip: invest in 'unloved' funds 03/24/13 [Last modified: Sunday, March 24, 2013 5:48pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Tribune News Service.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. New stores coming to Tyrone Square Mall, like Bath & Body Works

    Retail

    Tyrone Square Mall will welcome a half dozen new stores, like Bath & Body Works and MidiCi's The Neapolitan Pizza Company, this summer.

  2. Target Corp. reaches $18.5 million settlement with 47 states over data breach

    Retail

    Target Corp. has agreed to pay Florida $928,963 out of a newly-announced $18.5 million settlement over a huge data breach that occurred in late 2013.

    Forty-seven states and the District of Columbia have reached an $18.5 million settlement with Target Corp. to resolve the states' probe into the discounter's massive pre-Christmas data breach in 2013. 
[Associated Press]
  3. Gov. Rick Scott's family history of alcohol abuse could decide 'liquor wall' bill

    Legislature

    TALLAHASSEE — Gov. Rick Scott must decide Wednesday whether to let Walmart and other big-box stores sell liquor, and he says a factor in his decision is the history of alcohol abuse in his family.

    Florida Governor Rick Scott is considering a veto of a bill that would allow Walmart, Target and other big box retail stores to sell liquor. [Andres Leiva | Tampa Bay Times]
  4. Tampa lands Super Bowl in 2021

    Bucs

    TAMPA — Record rainfall in Los Angeles ultimately may end Tampa Bay's drought of hosting the Super Bowl.

    Mike Tomlin celebrates with LaMarr Woodley and Troy Polamalu after the Steelers beat the Cardinals in 


Super Bowl XLIII  on February 1, 2009 at Raymond James Stadium in Tampa. [Times files (2009)
  5. As St. Petersburg's Jabil Circuit broadens its business, it shrinks its name to Jabil

    Corporate

    St. Petersburg's Fortune 500 company, Jabil Circuit, informally tossed aside the "Circuit" in its name some time ago. That's because circuit board manufacturing, the company's core business for decades, has been squeezed out by a broader business agenda ranging from consumer packaging to supply chain management.

    Jabil Circuit informally dropped "Circuit" from its marketing material and signage, like at its St. Petersburg headquarters, years ago. Now it's official.
[Times file photo]