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.

"People will be eating corn chips and drinking orange juice next week -- no matter what the stock market does," he says.

Shipp also likes hamburger giant McDonald's ( MCD), which yields 2.80%. The company's same-store sales have been rising in the U.S. and abroad. In the second quarter, earnings rose 19%, while revenues increased 16%.

Another steady fund is Ave Maria Rising Dividend, which has returned 2.9% annually during the past five years, outdoing 97% of competitors in the large blend category. The fund has 39% of assets in consumer stocks. Portfolio manager Richard Platte favors high-quality companies that raise dividends year after year. Many of his holdings increased dividends even during the financial crisis. The portfolio holds many familiar blue chips, including Kellogg ( K) and Avon Products ( AVP).

"The companies in the portfolio have been around for awhile," says Platte. "They have achieved a degree of profitability that allows them to pay out dividends regularly."

A favorite holding is toothpaste maker Colgate-Palmolive ( CL), a steady performer with a long history of delivering consistent growth. Half the company's sales come from Asia and Latin America. Platte also likes Lowe's ( LOW), the home improvement chain. He says that depressed housing markets are hurting sales. But eventually housing construction will rebound as more households form and the economy recovers.

Cautious investors should consider FBR Balanced, which has 65% of its assets in stocks and the rest in bonds. About one third of the holdings are consumer stocks. During the past five years, the fund returned 3.9% annually, outdoing 95% of competitors in the moderate allocation category.

Portfolio manager Wade Stinnette looks for companies with high returns on equity and little debt. He aims to buy when stocks sell for 30% discounts to their fair values.

A big holding is Coca-Cola. Stinnette says that the soft-drink company has been using its huge cash flow to buy back stock and increase dividends. The company announced that it sold 1 billion cases in China during the first six months of this year, double the figure of five years ago. Stinnette also likes chocolate maker Hershey ( HSY), which has high returns on equity and a steady cash flow.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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