(FORTUNE Magazine) – It's not easy being a large-cap mutual fund manager these days. The market's meltdown has wiped out this year's gains and is eating away at last year's, and redemptions are on the rise. While individual investors can sell their stakes in Coca-Cola or Ford, park the cash in a money market fund, and ride out all the volatility, these fund managers--whose mandate is to invest in large-cap stocks--are responsible for billions of dollars of investments for millions of shareholders. They have to separate the real losers from those that are merely slumping.

For most managers the defensive plays are domestic. They're chucking companies that have bet on emerging countries for their growth, like Coke, Gillette, and Procter & Gamble. They've also gotten rid of financial services companies like Merrill Lynch and Travelers. While the bankers and brokers were favorites earlier this year, they're now getting walloped by exposure to emerging markets and hedge funds. "Financial stocks make up 17% of the S&P 500 index. I'm delighted to be at 3%," says Ben A. Hock Jr., manager of the John Hancock Growth fund. And last, these managers have thrown out cyclical industrial stocks such as GM and International Paper, which face a very bleak future if the global slowdown causes the U.S. economy to nosedive.

So what's left? Large-cap managers are desperate to smooth returns after their horrendous third quarter. They're buying anything that has a chance of producing consistent earnings in what looks to be a turbulent 1999. A lot of their conservative picks can help even the smallest investors find stocks for the long haul. Three areas in particular--pharmaceuticals, retail, and, surprisingly, technology--can boost a portfolio besieged by the turbulent markets.

PHARMACEUTICALS

An aging population, pricing flexibility, and a friendly FDA that is approving drugs faster than you can say "Viagra" have made pharmaceuticals companies look irresistible, say fund managers. With the bulk of their business in the U.S., their stocks are immune to jolts from emerging markets. Sure, the S&P 500 drug index is down 8% from its mid-July high because of general market turmoil, but given favorable market conditions, investors can find some good opportunities to troll for bargains.

Growth should eventually pick up, since many firms have new drugs in the pipeline. For example, Monsanto, Pfizer, and Merck are all developing inhibitors that treat rheumatoid arthritis. The market's big enough to accommodate all the competition, says David Corkins, manager of the $2.5 billion Janus Growth & Income fund, which has nearly 18% of its assets in pharmaceuticals stocks. "Drugs like these will allow for up to 30% earnings growth for these companies," he says.

The biggest names remain the safest. Jeffrey Lindsey, manager of the $650 million Putnam Growth Opportunities fund, has put 18% of his assets into companies like Pfizer, Warner-Lambert, and Bristol-Myers Squibb. John Laupheimer, manager of the $9 billion Massachusetts Investors Trust fund, who has 14% of his fund's assets in pharmaceuticals, favors health-care outfits like Guidant. He also sees great growth in Medtronic, which trades around 57, down 22% from its midsummer high.

RETAIL

With a slowing global economy, what's the best buy in retail? Check out the blue-light special in aisle 4. "We're in the food and drug chains," says Hock of John Hancock. "The Wal-Mart shopper is not going to stop buying his razors or apparel items because of a drop in the stock market." These downscale retailers have had mixed results during the market's slump--Kmart is down 45%, while Rite Aid has slipped only 15% from its late-August high. Nonetheless, they shouldn't be too affected by slumping consumer confidence.

Of his fund's $600 million in assets, Hock has put 21% in retail stocks like Kroger and Walgreens. He is also high on Albertson's, a grocery store chain based in Boise. Its earnings are growing around 17%, and the company is trading at a discount to the S&P 500, says Hock. Wal-Mart, down 13% from its mid-August high of about $70, is another strong retailer that should rebound nicely.

TECHNOLOGY

While many other sectors began to stumble in July, tech stocks held on strong until mid-September. Then they, too, came under the brutal selling spree. Microsoft plunged 12%, to $99, in three weeks; Cisco fell 21%, to $53; and Intel, now trading at $85, has bounced between $75 and $88.

Yet the tech rout has perplexed many portfolio managers, who feel it's unwarranted. "Technology is going to remain a driving force in our economy. Companies will continue to spend to remain competitive," says Erik Gustafson, senior portfolio manager of the $700 million Stein Roe Growth Stock fund. He's sticking to his 22% stake in tech stocks like Microsoft and Intel. He's also heavily invested in telecom equipment manufacturers like Cisco and Lucent, companies critical to the Internet's development.

Janus' fund manager Corkins has packed about 13% of his port- folio with cable stocks like Time Warner, Comcast, Cox Communications, and MediaOne. He's been relatively well served by them through the three-month downturn. Cox Communications hit its 52-week high of about $60 in early October. These companies are just finishing huge capital-spending programs to improve their network infrastructure. Equipment upgrades will boost cash flow, revenue, and margins once the companies can hawk phone and Internet service to their cable customers over one network and on one bill. "If you believe in the Internet and where it's going to go in the next few years, this is an exciting way to play it," Corkins says. "And cable is an industry that doesn't have the bugaboos of Asia or hedge funds."

--Julie Creswell