Standouts Among Strong Rivals

STOCK mutual funds performed strongly in the second quarter, with the average general domestic equity fund up 6.1 percent. Some of the best performers amid solid competition benefited from holdings in energy and overseas stocks. Three fund managers discussed their holdings and the outlook for the year ahead.

John L. Keeley Jr. runs the Keeley Mid Cap Value fund, and searches for midsize stocks that have been ignored by the market.

Looking for the Overlooked

The million Keeley Mid Cap Value fund aims to profit from corporate restructurings. The fund, which carries a front-end sales charge, or load, of 4.5 percent, gained 12.9 percent in the second quarter.

John L. Keeley Jr., 67, says he chooses the fund's 50 or so stocks from midsize companies that have been largely overlooked by Wall Street. These can include corporate spinoffs, companies that have emerged from bankruptcy and savings institutions and insurance companies that have converted from mutual to stock companies, among others. "These are companies that have had no Wall Street research, which allows us to get in early in the company's life cycle," Mr. Keeley said.

During the second quarter, he said, "the entire midcap space was strong, partly due to private equity purchases of small to midcap companies, because they were relatively inexpensive versus their cash flow."

The fund made money in Foster Wheeler, the engineering and construction company based in Bermuda, with operational headquarters in Clinton, N.J. The company "is part of the worldwide growth in infrastructure," Mr. Keeley said. He added that the company's "order backlogs are very strong." Its shares rose 83.2 percent in the quarter.

Another engineering and construction company, McDermott International, based in Houston, was also profitable for the fund. The company's Babcock & Wilcox subsidiary, which emerged from bankruptcy late last year, "has added considerably to McDermott's earnings and order backlog," Mr. Keeley said. Its shares rose 69.7 percent in the quarter.

Another winner was Joy Global, a Milwaukee maker of machinery used for coal mining. The company, which emerged several years ago from the bankruptcy of Harnischfeger Industries ,"is a direct play on coal as energy," Mr. Keeley said. Shares rose 36 percent.

He describes himself as "cautious" about the market's future. "I think interest rates will rise moderately," Mr. Keeley said, "which will make careful stock selection that much more important."

Help From Energy Stocks

Strong energy stocks drove the returns of the 0 million Pacific Advisors Small Cap A fund, up 15.4 percent. The manager, George A. Henning, 60, buys what he calls "undervalued businesses with good catalysts for growth" that he can hold at least three to five years. The fund, which carries a front-end sales charge of 5.75 percent, owns about 40 stocks.

In the second quarter, Mr. Henning said, much of the fund's growth came from holdings in the energy sector. "It's a long-term trend because there's such a high demand for oil all over the world, and the supply is limited," he said.

One energy holding was Hornbeck Offshore Services, a company based in Covington, La., that provides supply vessels to the offshore oil and gas industry, primarily in the Gulf of Mexico. "The stock pulled back in January and then rebounded after a good earnings report for the first quarter," Mr. Henning said. Its shares rose 35.3 percent in the quarter.

The fund also held Mitcham Industries, a company in Huntsville, Tex., that leases seismic equipment used for geographical surveys to the oil and gas industry. "It's a very high-growth area," Mr. Henning said, adding that the company was expanding its operations worldwide. Mitcham's stock rose 30 percent.

The fund profited from Darling International, based in Irving, Tex. The company provides rendering and recycling services to the domestic food industry. Darling collects animal byproducts and used cooking oil from food-service establishments, recycling it into feed ingredients, industrial oils and alternative fuels. The company "has a lot of potential," Mr. Henning said. Its shares rose 40.6 percent.

For the months ahead, Mr. Henning said: "I'm still pretty positive about the stock market, even though we might have a small correction. While interest rates are higher, they're still near their historical range."

In Search of Surprises

The 6 million Quaker Strategic Growth C rose 12.5 percent in the quarter. Manu Daftary, 50, the lead manager of the fund, says he focuses on "companies with earnings momentum, a high potential for earnings surprises and reasonable valuations."

Second-quarter performance was strong, Mr. Daftary said, because of a "realization among investors that the global economy was gaining momentum while, at the same time, the U.S. economy was deaccelerating due to lower consumer spending." He added that the fund "was structured to take advantage of this trend."

Like the Keeley fund, Quaker Strategic Growth held McDermott International, the construction company. The fund also made money in Freeport-McMoRan Copper & Gold, based in Phoenix. The company has copper, gold and silver mining and production operations, primarily in Indonesia. "It performed well because of higher copper prices and its attractiveness as an acquisition potential," Mr. Daftary said. The stock rose 25.1 percent.

Another winner was Transocean, of Houston, an international provider of offshore contract drilling services for oil and gas wells. The company, which owns and operates offshore and barge drilling units, "handily beat earnings expectations," Mr. Daftary said. Its shares were up 29.7 percent.

Like Mr. Keeley, Mr. Daftary is cautious about interest rates. "Rising interest rates globally, coupled with continued deterioration in housing prices and tightening of credit in the U.S., leads us to believe we are looking at tepid equity returns going forward," he said.