With high stakes in the sector, headwinds could be on the horizon for these funds.
A version of this article was originally published in the April 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
For quite a while, consumer staples companies were favored by investors. One reason: Their dividends were relatively high and seemed safe because of the companies' sound financial underpinnings. With fixed-income payouts paltry or near zero, dividends of even 3% gained quite an allure. Investors also figured that in shaky economic times, people might delay buying new cars and governments might slow construction spending, but people would still drink beer, clean their houses, and buy toothpaste.
But in 2016, this sector--which Morningstar labels "consumer defensive"--fell out of favor. Interest rates started rising, reducing the appeal of their dividends. The U.S. election results led many people to expect a spike in growth, and the possibility of lighter regulation bolstered the appeal of financial stocks. Many consumer defensive companies also felt pressures of their own: Nestle NSRGY and Unilever UL were just two of the firms in the sector that reported meager growth and warned that could continue, partly because emerging markets weren't providing the expected oomph.
The consumer defensive sector has performed a bit better in relative terms thus far in 2017, as optimism that high growth rates and heavy infrastructure spending would soon arrive has tempered somewhat. But the concerns cited above have not abated. If the consumer defensive sector does lag, funds with notably high stakes in these stocks thus could be facing headwinds. Here are a few to keep an eye on.
Manning & Napier World Opportunities EXWAX
This fund has faced issues in the past couple of years, notably weak performance in 2014-15 as plummeting oil prices took a toll on its heavy energy stake, which led to some changes in its management structure. The fund did bounce back in 2016, but its hefty consumer defensive stake is worth noting. As of Feb. 28, 2017, the fund had roughly one fourth of its assets in the sector, more than double the average weighting for the foreign large-blend Morningstar Category. The managers have liked those stocks for their ability to provide appealing growth rates even in a slow-growth economic environment, and in some cases to profit from the potential growth from emerging-markets consumers, a trait they ascribe in particular to Unilever. Conversely, the fund has no exposure at all to the financial-services sector, which takes up about one fifth of the category average.
Virtus Foreign Opportunities JVIAX
This fund lost longtime manager Rajiv Jain in March 2016, but it retains its devotion to consumer stocks under new lead manager Matt Benkendorf. He says he is not concerned that some income-seeking investors may be returning to bonds, saying these stocks retain their other benefits. As of year-end 2016, the fund had more than 40% of its assets in the sector, and while that figure has come down a bit this year, it remains very high. Tobacco stocks, a favorite under Jain, have been reduced but remain prominent. British American Tobacco BATS, which has been in the portfolio since 2002, and Philip Morris International PM joined household products firms Reckitt Benckiser and Unilever as four of the top seven holdings as of March 31, 2017. This approach has helped the fund to become a stellar relative performer in market downturns, as these types of stocks tend to hold up better than more-cyclical fare when investors get skittish.
AMG Yacktman YACKX
This eclectic fund has long had unusual portfolio weightings. As with the funds cited above, the managers' search for companies with sound fundamentals that should be able to weather adverse economic conditions has often led them to consumer goods companies. That sector took up about one fourth of assets at year-end 2016. (Illustrating another angle of the managers' aversion to risk, cash took up another 20% of assets.) Once they identify consumer companies they like, they commit to them. Procter & Gamble PG is the top holding, with PepsiCo PEP also in the top five; these two stalwarts alone take up about 13% of assets. And these managers hold on to what they buy: The fund's turnover rate cracked 10% just once in the past seven years.