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Fund Spy

For These Funds, the Consumer Is King

Staples-heavy funds have struggled lately but could be ready to bounce back.

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The stock market has rallied nicely over the past two years, but one group that has had a hard time keeping up is consumer staples stocks. The rally has largely been driven by risky assets, with financial, energy, and technology stocks rising much faster than relatively staid firms that make food, beverages, and consumer products. Making matters worse, commodity costs have recently soared, potentially squeezing the profits of food and household-product companies and/or forcing them to raise prices. The consumer goods sector has been the worst performer out of the 12 Morningstar stock sectors so far in 2011, with big names such as  Procter & Gamble (PG),  Coca-Cola (KO), and  Nestle (NSRGY) flat or down for the year.

Despite this poor short-term run, there are good reasons to like such stocks. Companies that make food, soft drinks, and soap may not be exciting, but they tend to be profitable and predictable, reliably generating positive free cash flows. If you're worried about a market correction after the recent runup, such stocks may be among the best places to be. Many of the biggest staples firms have wide economic moats (strong competitive advantages), and after two years of underperformance, wide-moat stocks look reasonably priced right now by a lot of measures, as my colleague Ryan Leggio recently noted.

Not surprisingly, mutual funds that own a lot of staples stocks have had a tough time lately. The consumer staples fund category, which includes such funds as Vanguard Consumer Staples Index (VCSAX) and Fidelity Select Consumer Staples (FDFAX), has the worst returns out of Morningstar's 21 domestic-stock fund categories so far in 2011 and over the past three months. Yet there are some smart fund managers with great track records who are big fans of staples right now, for the reasons noted above.

The following table shows the 10 diversified stock funds with the highest percentage of their portfolio in food, beverage, tobacco, and household and personal-products stocks, not including clone funds and those with less than $100 million in assets. We've also shown each fund's Morningstar Rating and its percentile ranking in its category over the past three months (as of Feb. 24).

Funds with the Most Exposure to Consumer Staples

($ Mil)
Staple %Mstar Rating% Rank Cat 3 Mo
Invesco Van Kamp Glb Fr (VGFAX)World Stock1,598.759.75 89Dreyfus Worldwide Growth (PGROX)World Stock441.439.05 61Virtus Foreign Opportunities (JVIAX)For Lg Growth1,102.135.71 97First Investors International (FIINX)For Lg Growth132.934.83 99Yacktman Focused (YAFFX)Large Value2,206.526.35 91Dreyfus Core Equity (DLTSX)Large Blend191.026.15 77Tweedy, Browne Gl Val (TBGVX)For Lg Value4,710.825.45 98Yacktman (YACKX)Large Value3,806.124.29 91Wintergreen (WGRNX)World Stock1,350.123.92 94Tweedy, Browne Value (TWEBX)World Stock430.723.43 77

The last two columns tell the story. These funds have performed terribly over the past three months, with all but one of them ranking in their category's bottom quartile, and six ranking in the bottom decile. Yet over the long term they've been fine risk-adjusted performers, with eight of the 10 earning 4- or 5-star ratings. Three management teams appear twice on this list, and it's no coincidence that all three are longtime favorites of ours, exemplifying a patient focus on high-quality stocks.

Dreyfus Worldwide Growth (PGROX) and Dreyfus Core Equity (DLTSX) are both subadvised by a team at Fayez Sarofim. (The latter fund is a clone of the team's larger domestic fund,  Dreyfus Appreciation (DGAGX), which just missed making this list.) At both funds the team maintains a concentrated portfolio of high-quality large-cap stocks, the main difference being that Worldwide Growth has significantly more foreign stocks than Core Equity (45% versus 13%). Coca-Cola, Nestle, Procter & Gamble, and  Philip Morris International (PM) are all among the top 10 holdings of both funds, with Worldwide Growth also having L'Oreal (LRLCY) among its top 10. All these stocks have been in the portfolios for years because turnover is almost nonexistent at these funds.

 Yacktman (YACKX) and Yacktman Focused (YAFFX) are managed by Don Yacktman and his son Stephen. They follow a similar strategy of buying and holding high-quality stocks, but they're more concerned with valuation than with the Fayez Sarofim team. They're also more willing to move into cash when they don't see enough bargains, and to own stocks from across the market-cap scale. Both funds have had significant small- and mid-cap weightings at various times in the past, but they're currently finding the best deals among large caps, including  PepsiCo (PEP), Coca-Cola, Procter & Gamble, and  Clorox (CLX).

Finally, there's  Tweedy, Browne Value (TWEBX) and  Tweedy, Browne Global Value (TBGVX), both managed by the same four-person team. Their current portfolios are somewhat less large-cap oriented than those of the Fayez Serofim team and the Yacktmans, but other than that they have a similar strategy, buying stable, profitable companies at a discount and holding onto them for a long time. Lately that has led them to food, beverage, and tobacco stocks such as Nestle, Heineken, Diageo, and Philip Morris International, all of which are among the top holdings of both funds.

Given all the short-term uncertainty in the market, there's no telling exactly when staples stocks will be in favor again. But patient investors who find these stocks attractive right now and are willing to wait for them to come around have good company in these funds.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.