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Seeking Long-Term Value in Big Firms

UBS Fund's Managers Pursue Future Winners Within Out-of-Favor Sectors

By Matthew Keenan
Bloomberg News
Sunday, May 8, 2005; Page F04

Thomas J. Digenan, manager of the UBS U.S. Large Cap Equity Fund, says he is avoiding most energy stocks because he expects oil prices to fall. His contrarian investments have led to one of the best three-year performances in the mutual fund industry.

"We really believe that if you focus on valuation, you're going to get it right," Digenan said in an interview from his office in Chicago.

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The money manager said he is buying shares of banks such as J.P. Morgan Chase & Co., undeterred by concern that eight interest rate increases by the Federal Reserve may depress banking industry profits. Digenan held just a few energy stocks, including Exxon Mobil Corp., as oil prices almost doubled in the past two years.

UBS's $210 million fund rose at an average annual rate of 6.3 percent during the past three years. Of 40 competing funds tracked by Bloomberg that concentrate assets in companies with market values of more than $10 billion, only the Goldman Sachs Growth & Income Fund has risen more. By contrast, the benchmark Standard & Poor's 500-stock index advanced at an annual pace of 4.4 percent in the three-year period.

Digenan, 41, has had about 3 percent of his fund's assets invested in shares of energy companies. Most of his competitors have about four times as much money devoted to the sector. The money manager's bearish stance is based on his forecast that oil prices will fall as much as 50 percent, to $25 to $30 a barrel, because he said demand for oil is abnormally high.

"We have a pretty good degree of confidence that oil is going to move toward fair value," Digenan said.

Digenan and co-managers John C. Leonard, 45, and Thomas M. Cole, 43, have largely steered clear of energy stocks for more than a year. The fund's largest energy holding is Irving, Tex.-based Exxon Mobil, which the UBS fund has owned for two years.

Exxon Mobil, which closed Friday at $57.60, represents 2.7 percent of the fund's assets. By contrast, the Goldman fund has 11 percent of its $1.2 billion in oil and gas stocks.

Digenan said he has hung on to shares of Exxon Mobil because he thinks they're fairly valued. The stock trades at 13.3 times what analysts expect the company to earn this year, compared with an average 19.3 for companies in the S&P 500.

Oil stocks climbed 36 percent in the past year, buoyed by optimism about demand for crude from the United States and emerging economies such as those of China and India. The S&P 500 rose 6.9 percent in the same period.


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