(PUB) Morningstar FundInvestor

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Buy the Unloved The Contrarian | Russel Kinnel

new money. The first two are similar to what we saw in the prior year, but large blend has made a rare flip from the unloved to the loved in just one year. Large-Growth Ideas Primecap Odyssey Growth 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 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 TRBCX is a gem run by Larry Puglia who is in his 20 th year on the fund. Puglia has produced top-quintile returns across the one-, three-, five-, and 10 -year periods without taking any extreme risks. Jensen Quality Growth 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, Ore. The fund gen- erally 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 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 RSNRX is a little like the above Oppenheimer fund in that it, too, has ex- tremes. 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. œ

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 and sell those with the greatest inflows. Over the past 20 years, it has worked pretty well because it is directing you to 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 see this more as sug- gested tweaks. Add some to the unloved pile and trim from the loved. We use annual flows for categories and then 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 U.S. stocks proved to be a winner, though small- and mid-cap stocks did even better. On the loved side, it suggested dumping emerging markets, foreign large value, and real estate. Those categories returned negative 0 . 1% , 20 . 8% , and 1 . 6% . So far, the unloved are thumping the loved. And what about for 2014 ? As we go to press, we have flows through November. I will post flows through December in mid-January on mfi.morningstar.com along with details on how the strategy has performed over time. At this point, 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.

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.

On the loved side, foreign large blend, diversified emerging markets, and large blend attracted the most