The prospects of rising market volatility, global political uncertainty and a major market pullback are prompting many investors to look for stocks that hedge against a market downturn. The $44.3 billion MFS Value Fund (MEIAX) has beaten 89% of its large-cap peers for the year-to-date by searching for companies with "durable business models," ample free cash flow, judicious reinvestment thereof and attractive valuations, Barron's reports, citing data from Morningstar Inc.

Fund co-manager Nevin Chitkara told Barron's that among MFS Value Fund's favored stocks are: banks Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and U.S. Bancorp (USB); tobacco company Philip Morris International Inc. (PM); drug makers Pfizer Inc. (PFE) and Johnson & Johnson (JNJ); and medical equipment maker Medtronic PLC (MDT). All eight were in the fund's top 11 holdings as of June 30 and accounted for slightly more than 24% of the portfolio's total value, as of that date, according to Morningstar.

Not Bargain Hunters

While the managers of the MFS Value Fund look for attractive valuations, they are not hunting for extreme bargains, according to Barron's. That is, they don't look for distressed companies selling at huge discounts. Instead, they seek out solid companies with strong balance sheets and excellent long-term prospects, which they tend to hold for an average of eight years, Barron's adds. The fund usually lags when the broader market is experiencing a rapid surge or when investors are piling into distressed stocks. For the year-to-date through August 10, the fund delivered a total return (including dividends) of 8.65%, versus 10.25% for the S&P 500 Index (SPX), per Morningstar.

Reasons for MFS' Picks

Chitkara told Barron's for its August 10 story that banks have strengthened their balance sheets since the financial crisis, and are still attractively priced despite their post-election appreciation. Additionally, they are generating significant amounts of cash that can be returned to shareholders. He also indicated that "there is the potential for regulation to get a bit easier," while rising interest rates would be "an additional catalyst." (For more, see also: Banks Are Hidden Gems For Investors, Goldman Says.)

Philip Morris is viewed as an "overlooked staple" by Chitkara. The stock has been in the fund's portfolio since 1996, he added, and a new reduced-risk product called Iqos, which seems to be much safer than cigarettes because it heats rather than burns tobacco, has had promising trials. (For more, see also: Why Philip Morris Is Up 24% in 2017.)

Global drug companies, such as Pfizer and Johnson & Johnson, are diversified against the risk of pricing pressure in the U.S. market, he says. President Trump has raised this risk by promising to take action against drug price hikes.

The fund tends to avoid biotech companies that concentrate on one product. Medical equipment maker Medtronic, meanwhile, is generating significant free cash flow and is returning it to investors, shrinking the share base and thus propelling both EPS and its share price upwards. Moreover, Chitkara says that the company is an innovator with pricing power.

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