From Morningstar: 2025-02-11 06:48:17

Buying the funds everyone else is selling can be a winning strategy. Fund inflows lead to more inflows, creating a self-reinforcing trend until popular titles become too expensive and unpopular titles too cheap. The Buy the Unloved strategy captures this dynamic, pointing investors to cheap or out-of-favor parts of the market that may be due for a rebound.

Morningstar’s Buy the Unloved study focuses on categories with outflows in the previous year, while avoiding those with heavy inflows. Investing equal sums in three funds with the largest outflows, then rotating into the unloved categories after three years, has produced impressive results. A $10,000 investment in the unloved portfolio in 1994 would have grown to $282,771 by 2024.

US equities saw strong returns in 2024, with fund investors favoring global and US large-cap blend equity funds over ecology and global growth stocks. While caution is warranted for unloved funds, a contrarian approach to fund selection can yield great results.

In Europe, unloved equity categories included global and European large-cap growth stocks, ecology, alternative energy, Asia ex-Japan equity, and UK equity. A few funds in these categories hold positive Morningstar Medalist Ratings, indicating potential for quality performance if market conditions are favorable.

Quality funds in unloved sectors in Europe include the JPM Climate Change Solutions UCITS ETF and Robeco Biodiversity Equities in the ecology sector, the GQG Partners Global Equity Fund and T. Rowe Price Global Focused Growth Equity Fund in the global large-cap growth equity sector, and the Schroder ISF Asian Opportunities and BlackRock Advantage Asia ex Japan Equity Fund in the Asia ex-Japan equity sector.

In the sector equity alternative energy category, funds like the Guinness Sustainable Energy and Polar Capital Smart Energy Fund have shown mixed performance but hold positive Morningstar Medalist Ratings. Despite underperformance, these funds may have potential if market conditions improve.



Read more at Morningstar: Unloved Funds That Could Be Future Winners