Looking for the Unloved in All the Right Places
Good opportunities lurk among Morningstar 401(k) funds getting outflows.
Morningstar's 401(k) plan has a pretty good reputation. It's a wide-ranging assortment of low-cost funds with solid managers and long-term track records selected by a committee that includes current and former fund researchers from across the company. For that reason the lineup is sometimes a source of ideas for investors. Typically they're interested in which funds the fund analysts are buying.
I decided to turn the tables a bit when I was rebalancing my own account recently. I looked for ideas among members of the Morningstar 401(k) that the outside world has been selling.
There're often great opportunities amid funds suffering outflows--funds with strong long-term advantages that may be temporarily out of favor with the investing public. Such offerings are ideal destinations for cash reaped when you trim your winners. An ongoing Morningstar study has found that buying such unloved funds can be profitable in the long run. That's because the popular funds are often in categories with strong recent trailing returns that have boosted expectations for them to unrealistic levels. Meanwhile, shunned, but still fundamentally sound, offerings usually lurk in areas that have lagged but may be due to lead in the future.
Dan Culloton has a position in the following securities mentioned above: VINIX, SLADX. Find out about Morningstar’s editorial policies.