By Lewis Braham
Barron’s
On the surface, employing a contrarian strategy sounds simple — buy what everyone’s selling. In practice, it can be painful to execute. But the evidence indicates it’s worth it.
According to a Morningstar study, “Buy the Unloved,” if you buy one fund from each of the three most unpopular categories — those with the biggest outflows in the previous year — and hold the funds for three years, you can beat the market. Over the past 20 years, this strategy has earned an annualized return of 10.4%, or a 623% compound return. By contrast, the S&P 500 only delivered 9.2% annualized, or 484% compounded. Buying funds from the most popular categories delivered only 246% — less than half of the unloved’s performance.
So, this year buy gold, commodities, and high-quality large-company growth funds, as those were 2013’s most unloved categories. Now, clearly, this strategy shouldn’t replace an asset-allocation plan. Morningstar’s director of fund research, Russel Kinnel, recommends that you only put 5% to 10% of your portfolio in contrarian funds, especially in niche categories like gold.