Inexpensive valuations are only one of the flags that go up when these managers look for stocks in this focused portfolio of 40 to 55 names. There are three main components in the fund's broad range of investment strategies.

Basic Value
The first component, the basic value strategy, seeks out-of-favor cyclical stocks in established industries that for some reason are trading at a discount to their normal valuations. Many of these holdings are in the financial and energy sectors. They make up anywhere from 30% to 50% of the fund's equity assets and have a current allocation of 45%.

Holdings in the group include Marathon Oil, which is involved in exploration, development and refining. "The market is more interested in pure play exploration companies than those involved in refining," Browne says. "Marathon is selling at a hefty discount due to its refining operations. But that business has enormous latent earning power when oil prices increase."

Another misunderstood stock in the portfolio, Boeing, was selling at an extremely cheap valuation when Browne bought it at the beginning of 2009. At the time, investors were worried that the global economic downturn would put a severe crimp in aircraft demand. Production delays in its 787 aircraft added to concerns. "At this point, the 787 has flown and is scheduled for delivery, and demand for new aircraft is picking up," he says. The long-term nature of many of Boeing's contracts and its substantial backlog of customer orders in both the defense and commercial businesses add to the company's appeal.

The fund also owns financial companies with diversified businesses that help shield them from the impact of economic downturns or interest rate movements. One such company is U.S. Bancorp. As one of the largest financial holding companies in the U.S., it operates in the consumer banking, wholesale banking, payment services and wealth management businesses. Another financial holding, JP Morgan Chase, is a diversified company with operations in banking, wealth management, asset management and credit card operations.

Consistent Earners
Stocks of the second component, consistent earners, have higher valuations than the basic value basket. Browne is willing to pay more for these because they also have strong, consistent revenues attributable to subscription-based models, strong brands or protected patents.

Information technology and health-care companies dominate this group. "Consumer staples are usually considered consistent earners, but we don't have any holdings in that sector," says Browne. "The safety premium has already been factored into those stocks and we're not finding good values."

Comcast, the largest U.S. cable television systems operator and largest Internet provider, falls into this category as well. The company derives most of its current revenue from cable subscription fees, a feature that helps insulate it from economic downturns. "In a tough economy, people would rather keep their cable TV going than buy a $100 pair of jeans. Even if they can't pay other bills, people will still hang on to cable and Internet access," Browne observes.

Like basic value names, consistent earners can also account for 30% to 50% of assets. They currently represent 43.5% of the fund.

Emerging Franchises
The final group, emerging franchises, consists of companies that can dominate a market niche and grow faster than other companies. Though they can make up as much as 25% of the portfolio, they now account for 11% of assets. Varian Medical Systems, a member of this group, is the world's leading maker of devices and software used to treat cancer with radiation.
The basket approach with these three components produces a balanced portfolio that the fund's managers believe will hold its own under a variety of market conditions.