James P. Barrow is betting on energy stocks such as Chevron Corp. and ConocoPhillips to lead Windsor II, Vanguard Group's largest actively managed mutual fund, past its benchmark for a record sixth year.

Barrow has outperformed the fund's benchmark, the Russell 1000 Value Index, since 1999 by purchasing shares of companies that have relatively low price-to-earnings ratios and pay above-average dividends. Energy stocks are still attractive by these yardsticks because record oil prices have led to higher profits and payouts, he said.

"I am not worried about that group of stocks," Barrow, 64, said from his office on the 31st floor of the J.P. Morgan Tower in downtown Dallas. "I would have sold them earlier if they had gotten priced to the point where they had a high P/E and a low yield. It's a pretty simple business."

Windsor II has climbed at an annual rate of 7.4 percent through June since the streak started, exceeding the 2.7 percent pace for the Russell index. It's the longest period of outperformance since the fund was started in 1985. Gains among energy stocks, which account for almost one-ninth of the fund's $38.7 billion of assets, have helped it outpace larger rivals.

The largest actively managed fund, American Funds' $102.4 billion Growth Fund of America, returned 2 percent annually during the period. The second-largest, American's $76 billion Washington Mutual Investors fund, returned 4.9 percent.

Barrow, a South Carolina native, has managed Windsor II since inception. His tenure is the longest among stock-fund managers at Vanguard, the second-largest U.S. mutual fund company. The firm introduced Windsor II after closing the original Windsor fund, managed at the time by John Neff. (The original Windsor fund has since reopened.)

Barrow's investment career started in 1963, after he graduated from the University of South Carolina. He interviewed for a job as an assistant to Neff in 1968 -- and wasn't hired.

"He has eons of experience and understands the ups and downs of market cycles," said William Quinn, president of American Beacon Advisors in Fort Worth, where Barrow co-manages a fund. "That's why he's strong enough to avoid passing trends in the market."

Barrow, Hanley, Mewhinney & Strauss Inc., which Barrow co- founded in 1979, oversees 70 percent of Windsor II's assets. The rest is handled by Vanguard's quantitative equity group, Equinox Capital Management LLC, Tukman Capital Management and Hotchkis & Wiley Capital Management LLC. Barrow Hanley's share accounts for about three-quarters of the $50 billion it manages.

Barrow goes hunting at least once a year, and likens his approach to investing to the way a quail hides from its enemies.

"When you go out and shoot quail, they'll be out in a cactus field," said the manager, who last year shot doves in Argentina. "Everybody thinks a cactus field is a very bad place for them to be, but the quail like it because it keeps all the predators away."

Barrow said he selected Chevron and ConocoPhillips, the second- and third-largest U.S. oil companies, five years ago because of their U.S. focus and P/E ratios. While the stocks have doubled since then, they have become cheaper relative to earnings as oil prices have surged, lifting profits.

Chevron, which ended the week at $56.67 a share, has traded at 10 times earnings for the past 12 months, down from 15 five years ago. ConocoPhillips fetches a price-to-earnings multiple of 9.2, compared with 12 in July 2000. It closed Friday at $59.35.

Dividends have increased as well. Chevron has boosted its payout by 38 percent since buying Texaco Inc. in 2001, and its 3.1 percent dividend yield is equal to its average yield during 2000. ConocoPhillips has raised its dividend by 55 percent since Conoco Inc. merged with Phillips Petroleum Co. in September 2002.

Chevron's shares have risen 9.5 percent this year, the least among the 28 stocks in the Standard & Poor's energy index. ConocoPhillips, the group's sixth-best performer, has jumped 42 percent.

The next leg of the industry rally may happen as investors reconsider the companies' profitability and pay more for their shares, Barrow said. "These companies' earnings are going to be much more dynamic," he said.

Outside the oil industry, Barrow's holdings include Pfizer Inc., the world's largest drugmaker. He started buying the stock in the fourth quarter of 2004 amid concern about the safety and sales prospects of its Celebrex and Bextra painkillers. Pfizer bottomed in February at a seven-year low. It closed Friday at $27.57 a share.

"I probably like the opposite of momentum because when you manage a really big fund, you need the market to be fighting you a little bit," he said.

Barrow has returned an average of 12.9 percent annually since Windsor II started, almost matching Neff's performance at the original Windsor fund. Neff returned 13.3 percent a year for his 31-year tenure.

"I just believe that if you buy the cheapest stocks in the market, you will be pretty well rewarded no matter what the market does," Barrow said. "It's your philosophy that really protects you from yourself, because left to your own devices you will go out and buy whatever."

Bloomberg' s Demetrios Pasigos contributed to this report.