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Funds That Play Defense

These funds might not be as exciting as large-growth funds, but they can provide ballast when markets take a turn.

Consumer Defensive Sector artwork
Securities In This Article
First Eagle Overseas A
AMG River Road Dividend All Cap Value N
American Century Focused Lg Cap Val Inv

Consumer defensive stocks can get left behind when the economy is strong and investors are optimistic. Coming out of the 2022 market selloff, these stocks have once again fallen by the wayside. From October 2022 through May 2024, the Morningstar US Market Index’s 49.8% cumulative gain was double the Morningstar US Consumer Defensive Index’s 24.7% return. While these stocks may not be as exciting as some high-growth technology companies, consumer defensive companies tend to have stable cash flows that can act as a ballast when investors’ optimism wanes and the economy slows. We look at three funds that have been bogged down by their consumer staples stakes but may see a reversal of fortunes when these stocks are back in favor.

First Eagle Overseas SGOVX carries a Morningstar Medalist Rating of Bronze as of April 2024. Managers Matthew McLennan and Kimball Brooker take a unique approach to constructing their risk-averse portfolio. The managers seek firms with margins of safety in businesses with stable earnings, healthy balance sheets, or valuable tangible or intangible assets. This has resulted in a conservative portfolio that had a 20% stake in consumer defensive stocks in April 2024, nearly 3 times that of the MSCI ACWI ex USA Index. To further damp the portfolio’s volatility, the managers also stash a portion of assets in gold bullion if equity opportunities are scarce. This defensive posture led First Eagle Overseas to a top-decile performance in the first nine months of 2022 when stocks sold off, but it put the fund at a disadvantage in the market rally from October 2022 through May 2024. Its 32.1% cumulative gain trailed the bogy by 9 percentage points and trailed 96% of its foreign large-blend Morningstar Category peers.

AMG River Road Dividend All Cap Value ARDEX (rated Bronze as of March 2024) seeks to deliver a yield 150% greater than that of its Russell 3000 Value Index prospectus benchmark. Because of this, comanagers Thom Forsha and Andrew Beck seek firms that pay juicy dividends, often in the form of utilities, financials, and consumer defensive stocks. In April 2024, the portfolio’s 15% allocation to consumer defensive stocks was nearly double the benchmark’s 8%. This value-oriented, disciplined approach held up better than the index and typical large-value category peers when stocks sold off in 2022, but its performance since then has been underwhelming. The fund’s 20% cumulative gain from October 2022 through May 2024 beat just 3% of its peers and was dusted by the index’s 34% gain.

American Century Focused Large Cap Value ALVIX (rated Neutral as of June 2024) has a risk-aware approach that focuses on downside protection. Lead manager Brian Woglom holds just 30-50 stocks that have improving returns on capital, low leverage, and durable competitive advantages. This approach has led the managers to invest heavily in consumer defensive stocks, which made up 16.9% of the March 2024 portfolio. This conservative approach has weighed on performance recently. The fund’s 27.5% cumulative gain from October 2022 through May 2024 trailed the Russell 1000 Value Index by about 7 percentage points and beat just 15% of its large-value category peers. The recent stretch of underperformance highlights some of the short-term risks of the strategy, but long-term investors should benefit from a disciplined process.

This article first appeared in the June 2024 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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