The fund is emphasizing a number of themes, including companies that serve the corporate sector, where healthy balance sheets and strong cash flows will support rising corporate spending. Companies with a strong presence in emerging markets and scalable business models that can leverage existing infrastructure also merit attention, as do those that stand to benefit from higher commodity prices.

Among the latter group, Babin believes that energy stocks, even after their recent surge, have the potential for further expansion. About a year ago, before the upturn in energy prices picked up steam, he began building the fund's position in that sector. He has ramped up the fund's exposure to nearly double the sector's weighting in the S&P 500 Index with stocks such as BP PLC, Schlumberger, Unocal and Anadarko Petroleum.

"People say there is a lot of oil in the ground, and we just need to find it," he says. "But we think global demand, driven by a growing middle class in India and China, will drive oil prices higher. The magnitude of the energy crisis has been vastly underestimated." Energy stocks, he believes, "have not yet begun to break into their all-time highs."

He is also slightly overweight in the technology sector relative to the index, where companies have been building cash and improving their balance sheets. He recently added to the fund's position in Texas Instruments. The stock had been under pressure because of its large exposure to Nokia, a customer that has been losing share in the handset market, and because of a decline in the semiconductor group as a whole. Babin believes that analysts, who are focusing on short-term problems with Nokia, are ignoring the company's improving profit margin and the potential for further improvement from manufacturing efficiency, cost cutting and pricing improvement. The company is also diversifying its customer base with other handset manufacturers, such as Samsung.

In the financial sector, he recently initiated a position in Genworth, an initial public offering of an insurance subsidiary of General Electric. The company, which offers life and health insurance as well as investments, was priced at a 7% discount to book value. Babin believes the company's management team should be able to increase return on equity as an independent company.

Although the fund is currently underweight in the financial services sector because of concerns over rising interest rates, several financial service stocks, such as PNC Financial Services Group and Citigroup, have high dividend yields of more than 3.5% weighing in their favor. "A dividend yield of 3% or more goes a long way toward meeting the returns offered by the stock market," says Babin. "This is not a yield-oriented portfolio. But if a company has the qualifications we are looking for, a good dividend is a plus."

Other new positions include Tiffany & Co. and Deere & Co. While stock of the well-known, high-end jewelry seller took a hit in the second quarter as investors mulled the impact of disappointing sales in Japan, Babin believes the powerful brand name overshadows what he considers a short-term problem. A recent drop in the stock of farm equipment maker Deere also presented a buying opportunity. With land values and commodity prices on the rise, he reasons, farmers are in a good position to make new equipment purchases.

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