NEW YORK - Despite a less-than-spectacular outlook for 2006, mutual fund managers cited by Lipper as "Lipper Leaders" last week said they see some encouraging signs of value, if investors know where to look. And mainly, they said, value can be found among a number of large-cap stocks.

Managers attending the conference, which Lipper of New York organized, each offered their portfolio philosophies and perspectives for the future.

"This is not a bad environment for stock investing," said Peter M. Klein, the lead manager for Fifth Third Multi Value Fund, a multi-cap value fund based in Cleveland. Klein cited the potential end to interest rate hikes, inflation of about 2.5% and projected corporate earnings of between 7% and 9%, as signs of a stable, albeit not booming, economy.

"The biggest risk is if the Fed overshoots," said I. Craig Hester, co-manager of the Hester Total Return Fund. Barring that, Hester anticipates most major indices to advance between 7% and 9%, in step with corporate earnings, he said.

Klein, whose fund invests in companies of all sizes, is betting that bigger will be better this year. In fact, the Fifth Third Multi Value is now 70% invested in large-cap stocks, compared to a few years ago when half of the $335.8 million fund's assets were held in small-cap stocks.

Many investors, Klein said, "are buying optimism and selling pessimism. We do the opposite." Klein's strategy is to look for the silver lining in otherwise gloomy news. For example, Klein favors AIG. Despite legal woes and an exodus of former executives, Klein believes the New York insurance giant will rebound, potentially rewarding shareholders richly. Klein cited Bank of New York as another undervalued company, as well as John Deere, a manufacturer of farm and lawn machinery where sales have suffered in recent years, but which has undergone strong internal improvements, according to Klein.

Like Klein, Hester also looks for value. The Austin, Texas-based manager sees a continued trend of minor gains, and some major losses in 2006, with a potential downturn of as much as 15%. To account for that, the Hester Total Return Fund is only 85% invested, so that managers might use the 15% cash reserve to help correct losses, he said.

Hester's favorite stocks for the upcoming year include Tetra Technologies, a company based in The Woodlands, Texas, that manufactures chemicals to enhance oil and gas production, and MDU Resources, a company based in Bismarck., N.D., that serves the natural resources industry. Recent hurricanes in the Gulf of Mexico mean considerable rebuilding within the oil industry, which means more work for companies like these.

Hester also likes computer manufacturer and technology company Hewlett-Packard, which has a new chief executive team. AIG, Bank of New York, Citigroup and General Electric also offer promise, according to Hester.

Don Hodges, founder and co-manager of the Hodges Fund, is also thinking big for 2006. His Dallas-based fund typically includes stocks of companies of all size, but for 2006, it will be all about what he calls the "big chickens" of his fund - the reliable stocks that will lead the little ones. Home Depot, Wal-Mart and Halliburton rule the roost, while Apple, E*Trade and American Medical Response, the "smaller chickens," will probably do well but are not yet in flight, Hodges said.

Finally, Hodges has his "eggs," or what he considers "unusual" picks that he hopes have big potential. These include Rocky Mountain Chocolate Factory, Lifetime Fitness and Burlington Northern SantaFe, a rail company that is likely to get business from truckers bruised by rising oil costs. He's also got his eye on deep-sea drilling companies, including Transocean. Disasters along the Gulf Coast have created opportunities for modular housing companies, like Palm Harbor Homes, which Hodges believes is on the cusp of an "imminent" turnaround.

James McGlynn, manager of the Summit Everest Fund in Cincinnati, is also bullish on railroads, which have no international competition and are increasingly the most efficient and cost-effective way to transport goods. McGlynn, who espouses sub-sector investing, also points to broadcast media as an area of growth. When stores and restaurants struggle, they turn to television and radio advertisements. Time Warner and Viacom offer potential, according to McGlynn, because both face splits. He also looks for big companies that gobble-up their smaller competitors, citing Disney's acquisition of Pixar as a good example of a deal with a potentially promising payout for shareholders.

B. Randy Bateman, portfolio manager for the Huntington Situs Small Cap Fund, sees moderate growth in small-cap markets and a strong likelihood of large companies acquiring small companies. This year, consumer-related stocks are likely to lose ground to technology stocks, he added.

Based in Columbus, Ohio, the fund focuses on companies' locations, looking for those moving into areas where developer-friendly tax codes, socio-political dynamics or demographic changes suggest new growth and opportunities for investment.

Bateman currently favors companies like Mentor Graphics, a manufacturer based on Wilsonville, Ore., that designs products to help streamline production of electronic devices; Cerner, a healthcare information and technology provider based in Kansas City, Mo.; Intergraph, an information technology company based in Huntsville, Ala.; and Intermagnetics General of Latham, N.Y., which specializes in medical technology.

Schwab Core Equity Fund manager Vivienne Hsu focuses on "surprise anticipation." Her San Francisco-based team looks for stocks that have the potential to surprise the rest of the market, as Apple did a few years ago. When the stock traded at $35 per share, many investors saw little potential for an increase in value. Since then, the stock has topped $80 per share. Hsu remains a fan of Apple, and also recommends MetLife and Boeing. Meanwhile, Hsu said the fund has shied away from energy companies or those that rely on consumers' discretionary income.

Those who feel that the current climate is too dicey to invest, take heart. There is one permanently safe bet - we don't live in a society of angels, according to Charles L. Norton, co-portfolio manager of The Vice Fund of Dallas.

The fund, which invests only in alcohol, tobacco, gaming and defense companies, operates on the philosophy that no matter what the market does, people's basic nature never changes.

"People have been drinking, smoking, gambling and fighting for hundreds, if not thousands, of years," Norton said. "And they will continue to do so, no matter what."

Norton favors Altria, maker of Marlboros. With the opening of the Chinese market, Altria stands to profit from that country's 350 million smokers. American Science and Engineering, which manufactures sophisticated x-ray machines, is another Vice Fund favorite. The Department of Homeland Security recently secured $34 billion in funding for container security at ports and borders. Norton anticipates a dramatic increase in the proportion of containers scanned, considering that today only 2% are opened.

Finally, Norton cited AmBev, a Brazilian brewery that has 70% of that country's market share and access to many other fast-growing beer markets.

"What is off limits for hundreds of socially responsible funds is an opportunity for us," he said. "It's part of human nature."

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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