BOSTON (TheStreet) -- The markets are surely in for more tumultuous days as the European sovereign debt crisis comes to a head and the U.S. economy struggles through its current malaise.
That's why many investors have decided to head for the relatively safe, but meager, yields of the bond market, although the S&P 500 is still in positive territory, up 2.6% this year as of June 1.
It's been a disappointing performance after the 12% gain in the first quarter, followed by a face plant in May, and that has left many with a foreboding that we're in for a repeat of the 2008 financial crisis.But that doesn't mean investors have to give up the ship and jump in the bond-market lifeboats only to then have to fret about the prospect of inflation draining their returns. That's because there are always a few defensive-stock stalwarts to hide in so as not to miss out on an unexpected market rebound, as so frequently happens after a market selloff. In light of that, a Morningstar analyst identified about a dozen of the ratings firm's highest-ranked mutual funds that have consistently beaten their peers during previous downturns, including the gut-twisting decline of 2008, to give investors some alternatives to the stodgy fixed-income marketplace. I then cherry-picked those funds to identify some of the stocks that appear most frequently among their top holdings, excluding iPhone and iPad maker Apple (AAPL), given that it's a top holding of virtually every large mutual funds these days. Many of the stocks in these funds are tried-and-true defensive stocks, a list that tends to get dominated by consumer-staples companies, such as household products maker Kimberly-Clark (KMB) and health-care conglomerate Johnson & Johnson (JNJ). Neither one has impressive share-price return records, but their healthy dividends, fortress-like balance sheets and industry-leading positions underscore their appeal when times are tough. These defensive funds also favor retailers that cater to budget-conscious consumers, such as discount clothier TJX Cos. (TJX) and the world's largest retailer, Wal-Mart Stores (WMT). Among the best defensive funds cited in the report by Morningstar analyst Adam Zoll are the $5 billion FMI Large-Cap Fund ( FMIHX) as this large-blend fund has an enviable record bolstered by both Kimberly-Clark and Wal-Mart. It outperformed the market during the downturn of 2008, when it lost 27% (compared to the 37% drop of the S&P 500) and during the start of the rebound in 2009, when it gained almost 30%, versus the 26.5% return for the S&P 500. Its annualized five- and 10-year records put it in the top 5% of the funds in its category. Another cited by Morningstar is the $1.3 billion Amana Trust Income Fund ( AMANX ), which only buys stocks of companies in businesses that are in accordance with Islamic law. That means it eschews alcohol, tobacco, gambling, pornography and pork companies' stocks, as well as those paying or receiving interest. That last limitation helped it dodge the meltdown of the financials sector a few years back, but it missed out on their subsequent rebound. Still, it has a three-year annualized return of 9.2% and a 10-year return of 8.2%, which puts it in the top 1% of funds in its large-blend category for the decade. Morningstar says "it's an excellent core stock fund not just for Muslim investors, but for anyone seeking stability and a decent yield," currently at 1.54%. Sports apparel behemoth Nike (NKE) is the fund's largest holding at 2.5%, and it has been in the portfolio since the start of 2007. Computer software and hardware conglomerate Microsoft (MSFT) is also a top holding, as it is with many other top-rated Morningstar funds. Microsoft's 2.8% dividend, coupled with strong long-term prospects, has helped it garner 15 "buy" ratings from analysts. Standard & Poor's has it as a "buy" with a $37 price target, which is a 30% premium to its current price. Regularly one of the favorite ports in a market storm for many investors is the $10 billion Vanguard Dividend Growth Fund ( VDIGX). Its 25.6% loss in 2008, when the S&P plummeted 37%, helped put it in the best-performing 3% of all large-blend funds for that year, according to Morningstar. Its five-year record puts it in the top 2% of the funds in its category. The dividend yield is 1.99%. Johnson & Johnson is its second-largest holding at 3.3% of the fund, and Microsoft is not far behind at 3.2%. The $80 billion Fidelity Contrafund ( FCNTX) is another Morningstar bear market pick, as it is up 5.5% this year and weathered the market's gyrations over the past decade to post a 10-year average annualized return of 7.2%, a performance that puts it in the top 3% of its large-growth fund peers. Among its top long-held picks are TJX, which has been in the portfolio since 1995 and is now its eighth-largest holding, and household products giant Colgate-Palmolive (CL), a top-20 holding since 1999. Here are eight stocks held by top-rated Morningstar "defensive" mutual funds that have weathered previous market backslides in fine form, ranked in inverse order of analysts' "buy" ratings:
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