Richard Pzena, co-manager of the $1 billion John Hancock Classic Value Fund, invests in the damaged goods of the U.S. stock market.

His list includes airplane manufacturer Boeing Co., insurance broker Aon Corp. and mortgage buyer Freddie Mac.

"We don't buy the best businesses with the fastest growth rates, highest margins and wonderful management teams," Pzena said in an interview. Businesses like that "don't sell for low prices, and if your focus is on price, then you have to accept that one or more of those things is going to be missing."

With an average annual return of 12 percent in the past five years, the fund outperformed 94 percent of similarly managed funds, according to data compiled by Bloomberg. The Standard & Poor's 500-stock index declined at an average rate of about 3 percent a year in the same period.

Pzena and co-managers Rama Krishna and John Goetz look at the country's 500 largest companies and whittle the list to about 100 with the lowest stock prices relative to what the managers call "normal" earnings levels. They then narrow the focus to about 40 companies with dominant market shares and effective turnaround plans.

The fund bought shares of Boeing, the world's second-largest commercial airplane producer, a year ago, when they fell to $25.

"Everybody hated it," Pzena said of Boeing stock. The 2001 terrorist attacks and a recession cut travel and, consequently, airplane orders. Attracted by Boeing's defense and spare-parts units, Pzena also anticipated a recovery in air travel.

He's still waiting, as plane orders haven't budged. Still, as Boeing counts on higher deliveries of the 737 models next year, its shares rose in June to a two-year high above $51.

Aon caught the managers' attention in August 2002 when shares of the world's second-largest insurance broker plunged 30 percent.

The managers were convinced Aon could improve profit margins in its brokerage unit, which were about two-thirds those of No. 1 broker Marsh & McLennan Cos. In May, Aon said pretax profit margin will climb to at least 20 percent next year from 16.5 percent in the first quarter.

Shares of Aon, trading as low as $14.60 when the managers started buying them 23 months ago, closed Friday at $26.90.

Freddie Mac, the second-biggest buyer of U.S. mortgages, ousted its top three executives in 2003 and acknowledged manipulating its financial records. The government-chartered company, based in McLean, has been working to restore confidence and rebuild its bookkeeping, while the Treasury Department has pledged to step up its oversight.

Freddie Mac is "fundamentally sound," Krishna said, with $10 billion more in capital than is required for withstanding shifts in interest rates and declines in home prices. On Friday, the stock reached its highest level in 25 months before closing at $67.24. "It's probably one of the cheapest stocks in the U.S.," Krishna said. "People either haven't spent the time to try to understand it or are very concerned about regulatory issues."

Pzena, 45, holds two degrees from the University of Pennsylvania's Wharton School and has a longtime interest in value investing. His master's thesis revisited the work of the value proponents Benjamin Graham and David Dodd, who influenced billionaire Warren Buffett.

He got further grounding in value investing during a decade as an analyst and portfolio manager at Sanford C. Bernstein & Co. He left Bernstein to found Pzena Investment Management LLC in 1995.

"It's a personality," Pzena said of his value bent. "You're either a pessimistic value guy or an optimistic growth guy. You're either a bargain hunter or a dreamer, and we're bargain hunters."

Pzena opened the fund as the Pzena Focused Value Fund eight years ago. John Hancock Financial Services Inc. acquired and renamed it in 2002. Manulife Financial Corp. of Toronto bought John Hancock of Boston in April.

Pzena's firm oversees $7.2 billion for clients, including the California Public Employees' Retirement System, the largest U.S. public pension fund.

Krishna, 40, joined Pzena in September from Citigroup Inc. Goetz, 46, has been with the fund since it opened.

The John Hancock fund charges fees of $11.60 per $1,000 invested, less than a value-fund average of $13.80, according to Bloomberg data. The fund is sold with a 5 percent upfront sales fee and requires a minimum initial investment of $1,000.

Pzena said he is finding fewer undervalued stocks in 2004 than last year. At the same time, investors poured $530 million into the fund in the first half of the year. Rather than keeping a lot of cash, Pzena said he bought "boring" stocks such as MetLife Inc. and Sara Lee Corp.

MetLife, the second-largest U.S. insurer, is up 3.2 percent this year, Pzena said. While Sara Lee cut jobs in its clothing unit, the company's food and beverage units reported gains, and its shares are up 4.9 percent since Jan. 1.

"You can make 10 to 15 percent a year while you're waiting for the next set of really depressed opportunities," Pzena said.