It was a good quarter to be on the defensive.
Mutual funds that focus on less risky companies like health care providers and utilities had the biggest gains during the April-June period.
Health care funds returned more than 8 percent, the most of any category tracked by Morningstar. Funds that own utility stocks returned 4.2 percent. And consumer-staples funds, which own stock in companies such as Procter & Gamble and Coca-Cola, returned 4.2 percent.
Consumers spend money on health care, food and beverages even when the economy is weak. Defensive funds also tend to pay a high dividend, so they are attractive for investors seeking steady income. Utility stocks in the S&P 500 have a 4.3 percent dividend yield, for example, while consumer staples have a 3.2 percent yield. The broader S&P 500 has an average dividend yield of 2.1 percent.
Investors bought defensive funds during the quarter because of concerns that the economy had slowed due to high gas prices and weakness in hiring and manufacturing. The S&P 500 fell 0.4 percent, its first down quarter since the second quarter of 2010.
The volatility in stocks sent many investors into bonds. Long-term government bond funds returned 4.5 percent during the quarter. High-yield, or junk bond, funds returned 0.3 percent. Those funds had some of the highest returns in 2010. But they lagged behind because they are riskier than Treasurys.
Still, some analysts say investors might have been too quick to buy defensive stocks and funds. A positive economic forecast from FedEx last week bodes well for higher-risk companies like manufacturers, said Michael Sansoterra, a portfolio manager at Silvant Capital Management.
