Investment ideas for the lovelorn

• Reprints

Updated: August 4, 2011 4:20PM

Some investments need a little love. Almost by definition, they are a real catch.

They are the tired, the poor, the wretched refuse in the global money game and form the basis of what Russel Kinnel, director of mutual fund research at Morningstar, calls the “Buy the Unloved” strategy. But it seems to cry out for a catchier tag like the “Ugly Duckling” strategy.

It boils down to this: In the universe of stock investments, you look for the least popular of the broad sectors, including the large- to small-caps, “value” to “growth” companies, and you put money in them. At the same time, you cut your exposure in the sectors that have gotten too much love. While true love has no fixed dimension, the market’s version has a convenient yardstick: cash inflows and outflows from mutual funds.

Morningstar has tracked the strategy since 1994 and finds that it takes advantage of the market’s tendency to overshoot on both the high and low ends. Stocks that are beaten and battered have a way of coming back, while those that win popularity contests usually disappoint.

“Holding the unloved funds for three to five years and selling or trimming the loved for that same period have yielded strong returns over the years. However, the results are lumpy,” Kinnel wrote in an article Morningstar posted last week. He said the strategy looks brilliant when “there’s a dramatic pivot year like 2008 or 2009,” but less so when stocks move more in unison. Buying the unloved group, holding it for three years, then reinvesting it in the unloved group for year four has produced average annual returns of 9 percent since 1994, Kinnel said. That’s better than the market as a whole or investing in the loved category, which fares the worst of all.

Large-cap companies have trailed overall market performance lately and have taxed investor patience. So this year’s unloved categories, Kinnel reported, are large growth (outflows of $45 billion), large blend (outflows of $17 billion) and large value (outflows of $4.5 billion.) Sectors where the inflows have headed are diversified emerging markets, foreign large blend and commodities funds, he said.

Kinnel suggested several funds through which investors can pursue the unloved. They include Harbor Capital Appreciation (HACX), T. Rowe Price New America Growth (PRWAX), Longleaf Partners (LLPFX), Dodge & Cox Stock (DODGX) or several low-cost index funds from Vanguard.

AN OPPOSING VIEW: While Morningstar highlights value stocks, Calamos Investments is coming out strong for the higher risk, higher reward growth category. Why? “We believe the world is growing, current valuations are compelling and growth stocks of innovative companies are poised to lead the market higher,” said John Calamos Sr., co-chief investment officer. His firm, which offers the Calamos Growth Fund (CVGRX), said price-earnings ratios show growth stocks are at their most attractive levels in 20 years.

IF YOU BUILD IT: Analysts at Robert W. Baird & Co. insist it’s time to invest in industrial services, stocks in engineering and construction that they believe are ready to zoom on projected growth in both private and public infrastructure projects. We’re talking roads, water, power and companies involved in various pieces of oil and natural gas exploration.

Baird analysts Andrew Whittmann and Justin Hauke said in a book-length tome that their “best ideas” in the sector are AECOM Technology (ACM), Quanta Services (PWR) and Shaw Group (SHAW). They see a likelihood of mergers in the industry.

AVM, they said, already has been on a buying binge and has strengthened its position in transportation and environmental services. PWR is the largest provider of contracting services for electric power transmission but gets steady income from telecommunications firms adding bandwidth, SHAW’s attraction, Baird’s team said, is its role in nuclear power and its partial interest in Westinghouse.

CLOSING QUOTE: “I mean it’s all jobs. I mean we really have an effective rate of 18 percent unemployment, not 9.4 percent. And it — depending on the way you count the numbers, it could be more than that. We’ll see what happens with jobs. We’ll see what happens with the fact that OPEC is ripping us, just as badly, or even worse than China. I mean worse than anything is OPEC. And nobody from this country even makes a call to say, hey, listen, you’re going to destroy our economy.

If you look at the prices now, they’re up to almost $100 a barrel. It’s going to be $120 and $130. And the last time that happened, we almost had a massive depression and nobody ever blamed the oil prices. They talked about the banks. And the banks were certainly at fault, but so was oil.

So if something doesn’t happen with oil, gasoline now is selling for way over $3 a gallon. If something doesn’t happen with that, if something doesn’t happen with jobs, I very well may do it, Wolf, because this is not a respected country anymore. We’re a whipping post for the world.” — Donald Trump, discussing his possible presidential bid with Wolf Blitzer on CNN