Morningstar Minute - These medalists invest in the unpopular

These U.S. equity funds may lag in strong markets, but they have posted top-quartile longer-term results.

Jeffrey Bunce, CFA 4 August, 2017 | 5:00PM
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Jeffrey Bunce: In my last video, we examined a couple of funds that were bullish on popular technology stocks like Facebook and Amazon, and had produced strong returns this year as a result. Investing in the unpopular can be profitable too, though.

One way to identify funds that are investing in stocks that others are shunning is by screening on a Morningstar proprietary risk factor called Ownership Popularity. The lower this metric, the less a fund's holdings are being bought by other funds. This is more of a contrarian approach, with the idea being to hold what others aren't currently interested in with the hopes that others do eventually buy, and value is realized. A couple of U.S. equity funds with Morningstar Analyst Medalist Ratings and below-average ownership popularity fit this bill.

First up is the Silver-rated Sun Life MFS U.S. Value fund. Unlike its sibling, the Sun Life MFS U.S. Growth fund, you won't find it holding popular tech stocks like Alphabet and Netflix. In fact, the fund is currently about 15 percentage points underweight on the technology sector versus the S&P 500. Instead, the portfolio is full of financials like JPMorgan, Wells Fargo and Goldman Sachs, which trade well-below the market price-to-earnings multiple. These are still well known, large-cap names, but not stocks that others are currently clamoring to buy.

Similarly, the Bronze-rated Beutel Goodman American Equity fund doesn't own the most popular stocks and is also underweight technology, but by a more modest five percentage points. The tech stocks they currently do own include top holding Oracle and top-six holding Amdocs. While these stocks are by no means cheap, with valuations slightly higher than the market, they aren't high flyers either.

Buying unpopular stocks means these two funds will likely lag in strong, rising markets. And true enough, they don't lead the pack on performance for the year to date, but they have posted top-quartile longer-term results.

For Morningstar, I'm Jeff Bunce.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc Class C177.71 USD0.71Rating Inc186.10 USD1.80Rating
Amdocs Ltd77.99 USD2.15
Meta Platforms Inc Class A501.70 USD0.44Rating
Netflix Inc679.03 USD-0.97Rating
Oracle Corp142.91 USD-1.20Rating
The Goldman Sachs Group Inc DR23.48 USD0.13

About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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