In the usual place: in plain view. Just as everyone “hides” a spare key under their doormat, returns have a way of being fairly obvious. In this case, Morningstar has a simple model for good performance: buy what no one else wants. Their idea, described in this MarketWatch article and also here at Morningstar, is simply to buy the most unloved mutual fund categories and hold them for three to five years.
Chicago-based Morningstar found that buying what other investors sell generated a 3.7% annualized gain over the decade through July, while the most-loved fund categories lost an average 1.2% a year and the Standard & Poor’s 500-stock index shed 0.8%.
And there is good news this year for domestic investors. One of the most unloved categories right now is large-cap U.S. stocks.
…this year, through October, the biggest redemptions by investors have been in three bread-and-butter categories focused on large stocks in the U.S. and abroad: Morningstar’s large-growth, large-value and world-stock groupings.
Mutual fund investors have been selling them in droves, and based on typical mean reversion, this category might turn out to be a good bet going forward. High relative strength stocks in the large cap area are part of this ugly duckling theme, but, in fact, they have performed incredibly well this year. Because large cap U.S. is such an unloved category this year, the good performance of high relative strength stocks has flown completely under the radar. In our own business, we have opened only an handful of new Systematic RS Aggressive accounts in 2010, even though current accounts have been rewarded with excellent performance this year. Another benchmark for high relative strength stocks, the PowerShares DWA Technical Leaders Index (PDP), hasn’t done quite as well but is still up 25.7% year to date and has easily outstripped the S&P 500.
Source: Yahoo! Finance
If Morningstar‘s thesis holds, it’s exciting to think that we could see good performance from domestic equities for the next several years.
To receive the brochure for our Separately Managed Account strategies, click here. More information about PDP can be found at www.powershares.com.
Click here for disclosures. Past performance is no guarantee of future returns.
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