Morningstar’s Picks for Fund Contrarians

The continuing excitement with high-flying Internet stocks and blue-chip stocks has eclipsed the traditional search for beaten-down assets.

Mark Headley, a manager of two Asian-stock portfolios for the Matthews International group in San Francisco, complains that investors aren’t paying much attention to this area despite a sharp year-end rally that saw one of the Matthews funds--its Korea Fund--finish in first place of all mutual funds in 1998, with a return of 96.2%.

“Most people still think Asia is a crazy place to invest,” he said.

Headley says the lack of investor attention being paid to Asia makes the region a good contrarian plan, and Morningstar Inc. agrees. In a new report, the Chicago investment-research firm lists three types of stock portfolios--Asian, Latin American and natural-resources funds--as the most unpopular categories around.

Morningstar defines “‘unpopular” as those funds with low percentage changes in cash inflows from investors. Poor performance is not the key ingredient, although it’s often a byproduct.

Using back-tested results over roughly the last decade, Morningstar says that if you had invested equally in each of the three most unpopular categories and held for three years, you would have outperformed the average stock fund 78% of the time.

Morningstar suggests putting a modest amount in all three categories.

“Often, only one of the three areas will catch on fire,” said Olivia Barbee, editor of the fund tracker’s newsletter. She suggests no more than 10% of your portfolio be in these neglected choices.

Morningstar offers a short list of purchase candidates in each of the following three neglected areas:

* Natural resources. Fidelity Select Energy, T. Rowe Price New Era and Vanguard Energy. As a group, funds in this category stumbled 25.2% last year.

* Latin America. Morningstar likes the Fidelity and T. Rowe Price Latin American funds, along with Scudder Latin America. Shaken by the Asian economic fallout and the region’s own currency-related problems, Latin American funds slumped 38.3% on average in 1998.

* Pacific Rim. Funds that invest in Asian stocks, excluding Japanese companies, fell only 10.9% last year, a big improvement over 1997. Morningstar likes Matthews Asian Growth & Income, Matthews Pacific Tiger and Newport Tiger.