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Consumer Funds Unfazed by Turmoil

NEW YORK ( TheStreet) -- Through all the market turmoil of recent months, some consumer funds have stayed in the black. While the S&P 500 has lost 9.5% this year, Vanguard Consumer Staples (VCSAX) has returned 2.4%, and Rydex Consumer Products (RYCIX) has gained 4.1%, according to Morningstar.

The resilience of consumer funds is not surprising. Consumer stocks include companies that sell things customers must buy constantly, including food, beverages, tobacco, and beauty products. The group includes rock-solid blue chips, such as Coca-Cola (KO), Procter & Gamble (PG) and Kraft Foods (KFT). Such stocks generate stable cash flows year after year.

Consumer stocks may seem unexciting in bull markets, but they can shine in downturns. This year many of the consumer stocks have done particularly well because the companies are recording strong sales gains in the emerging markets.

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"The market has been held back in recent weeks because of fear of recession," says Wade Stinnette, portfolio manager of FBR Balanced (AFSAX). "But staples tend to hold up better in downturns."

To benefit from the resilience of consumer stocks, consider holding a diversified fund that has a big stake in the sector. Top choices include Sterling Capital Equity Income (BAEIX), FBR Balanced, and Ave Maria Rising Dividend (AVEDX). Helped by their consumer stakes, all those funds posted strong results this year.

Sterling Capital Equity Income has about one third of its assets in consumer stocks. Holdings include Kimberly-Clark (KMB), the maker of Kleenex tissues, and Diageo (DEO), maker of Johnnie Walker whisky. Portfolio manager George Shipp looks for companies with strong balance sheets and the ability to deliver above-average growth. He favors stocks with histories of raising dividends. To limit risk, he sticks with companies that have below-average prices. Most often the strategy has worked. During the past five years, the fund has returned 3.8% annually, outdoing 99% of its competitors in the large value category.

A favorite holding is Pepsico (PEP), the giant producer of beverages and snack foods. The stock yields 3.3%, and the dividend has increased annually for more than three decades. Shipp says that Pepsico gets more than one third of its sales from the emerging markets. He argues that the business is recession resistant.

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