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Fund Spy

5 Great Core Funds for Contrarians

These funds remain excellent choices despite being out of favor recently.

It’s often tempting for mutual fund investors to buy whatever has been doing well recently and to avoid funds that have lost money or lagged the market. Almost inevitably, funds that go on a hot streak attract lots of new assets, while investors tend to flee from funds going through a slump.

But while there’s some evidence that momentum investing can work in the short term (for example, see "Does Momentum Investing Work?" by my colleague Alex Bryan), chasing short-term performance is a fool’s game over the long run. The most successful long-term investors (including the great Warren Buffett) have gotten where they are by learning to ignore the market’s short-term fluctuations and by going against the crowd when it’s appropriate.

Below, we highlight five large-cap stock funds that are currently out of favor but that still have a lot to offer investors. Each of these funds has badly underperformed its peer group in 2017 and the first five months of 2018, with most of them ranking in the bottom quartile of their category over both periods. Each fund has also suffered net outflows over the past year. Yet all of these funds have Morningstar Analyst Ratings of Gold or Silver, meaning that our analysts consider them to be among the very best funds in their category. Additionally, each of these funds has at least one manager who has invested more than $1 million in the fund, indicating that these managers are putting their money where their mouths are, investing right alongside shareholders.

 Invesco Diversified Dividend (LCEAX
)
Morningstar Analyst Rating: Silver

A team led by veteran manager Meggan Walsh runs this $22 billion fund, which earns a Morningstar Analyst Rating of Silver thanks to its disciplined process, reasonable price tag, and solid long-term track record. That process is a cautious one that places a lot of emphasis on downside protection, focusing on dividend-paying stocks with strong free cash flows and prices well below their estimated fair value. In 2017, the fund trailed 98% of the large-value Morningstar Category, and it has continued to rank near the bottom of the category so far in 2018. The main culprits have been poor results by consumer holdings such as  General Mills  (GIS), combined with the fund’s lack of exposure to big banks such as  JPMorgan Chase & Co (JPM), which have posted big gains. Despite this, the fund’s long-term record remains strong, especially on a risk-adjusted basis.

 Oakmark Select (OAKLX
)
Morningstar Analyst Rating: Gold

Oakmark Select is another excellent fund that has struggled recently, ranking in the bottom decile of the large-blend Morningstar Category in 2017 and for the year to date through May 24, 2018. It’s a highly concentrated fund that typically holds just 20 to 25  stocks, so that a few holdings can have a big effect on returns, either positive or negative. The fund’s energy holdings, plus a big position in  General Electric  (GE) (since trimmed), have been the biggest detractors over the past year and a half. Occasional short-term struggles like this are an inevitable byproduct of the fund’s concentrated portfolio and manager Bill Nygren’s disciplined approach, but Nygren has put together an outstanding long-term record in more than 20 years at the helm, helping earn the fund a Morningstar Analyst Rating of Gold.

 AMG Yacktman (YACKX
)
Morningstar Analyst Rating: Gold

This is another Gold-rated fund that has a concentrated portfolio and has underperformed recently. It’s managed by Stephen Yacktman and Jason Subotky, with longtime manager Don Yacktman (Stephen’s father and a former Morningstar Fund Manager of the Year) still around as an advisor after stepping down as comanager in 2016. About half of the fund’s assets are in the top 10 holdings, all of which posted very respectable gains in 2017; however, the fund’s 25% cash stake was a drag on returns relative to other large-value funds, causing it to rank in the category’s bottom quartile for the year. So far in 2018, the fund has been hurt by big losses from consumer holdings such as  Johnson & Johnson (JNJ),  Coca-Cola  (KO), and  PepsiCo (PEP), though its long-term returns remain excellent.

 JPMorgan Value Advantage (JVAIX
)
Morningstar Analyst Rating: Silver

This fund is less concentrated than the others on this list, with more than 100 stock holdings, and it holds more small caps and mid-caps. But its stock-picking approach is broadly similar, focusing on stocks that are cheap but have good balance sheets and cash flows. It has trailed the large-value Morningstar Category and the Russell 3000 Value benchmark in both 2017 and the first five months of 2018, though its diversified portfolio makes in hard to pin the blame on any one sector or stock. In any case, the fund’s long-term record under managers Jonathan Simon, Lawrence Playford, and Gloria Fu has been strong over the past 13 years, helping earn it a Morningstar Analyst Rating of Silver.

 Mairs & Power Growth (MPGFX
)
Morningstar Analyst Rating: Silver

Mairs & Power Growth is yet another fund with a long-term focus and an emphasis on high-quality companies, though, as its name suggests, it places less emphasis on valuation than the other funds on this list. It landed in the large-blend Morningstar Category’s bottom decile in 2017, largely because of its lack of holdings in the hot technology sector, and it has continued to lag its peers in 2018. Yet the fund has looked much better over a full market cycle, and it is run by an experienced, cohesive management team who have done a fine job implementing the fund’s conservative growth strategy, resulting in its Silver Analyst Rating.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.