Thomas Digenan's contrarian investments have led to one of the best three-year performances in the mutual-fund industry.

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Thomas Digenan, the manager of the UBS U.S. Large Cap Equity Fund, avoids 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.

The money manager said he has been buying shares of banks such as JPMorgan Chase, undeterred by concern that eight interest-rate increases by the Federal Reserve Board may depress industry profits. Digenan held just a few energy stocks, including Exxon Mobil, as oil prices almost doubled over the past two years.

UBS’ $210 million fund has risen at an average annual rate of 6.3 percent during the past three years.

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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 Index has advanced at an annual pace of 4.4 percent over the past three years.

Digenan has had about 3 percent of his fund’s assets invested in shares of energy companies. Most 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.

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

Exxon Mobil

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

Exxon Mobil 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, the world’s biggest publicly traded oil company, because he thinks they are fairly valued.

As of early this month, oil stocks had climbed 36 percent in the past year, buoyed by optimism about demand for crude from the United States and emerging economies such as China and India.

The S&P 500 rose 6.9 percent in the same period.

Digenan and his colleagues don’t mind being out of step with market trends, said Arijit Dutta, an analyst at Chicago-based research firm Morningstar.

“When a sector goes down, that’s when they pounce and look for opportunities,” he said.

The fund’s biggest investment is Citigroup, JPMorgan’s larger competitor. Top-10 holdings also include Morgan Stanley, the world’s largest securities firm, and Wells Fargo, a U.S. bank that had record earnings in the first quarter.

JPMorgan had record first-quarter net income, as investment-banking profit surged 30 percent, to $1.33 billion.

Excluding merger and legal-settlement costs, the bank earned 81 cents a share, beating the 69-cent average analysts’ estimate.

“The noise”

Digenan has co-managed the fund since 2001 alongside Leonard, UBS’ deputy global head of equities, and Cole, head of research for North American core equities.

The managers dissuade their 30 analysts from paying attention to short-term measures of a stock’s value, such as comparing price to earnings, Digenan said.

The team examines industry trends, analyzes competitors and looks at individual companies’ future earnings prospects to determine, he said, “if we were a cash buyer for the business, how much would we pay for it?”

“You can mix up the noise with information, and we want to stay away from that,” Digenan said.

The fund holds 65 stocks.

Albertsons, Botox

Digenan and his colleagues added to their stake in Albertsons, the second-largest U.S. supermarket chain, after the company said last month that its 2005 profit would be less than analysts had estimated. Albertsons, of Boise, Idaho, has the eighth-worst analyst rating in the S&P 500, according to data compiled by Bloomberg.

The 2,500-store chain has been gaining market share faster than rivals since a 4 ½-month strike in California ended in early 2004, Digenan said.

The fund has avoided most big pharmaceutical companies.

It does own shares of Allergan, the maker of the anti-wrinkle treatment Botox, which Digenan said provides good long-term prospects because of its new-drug pipeline.

The Irvine, Calif., company said pharmaceutical sales would be as much as $2.2 billion this year, including about $840 million coming from sales of Botox.

As baby boomers age, “the one area you do not have pricing pressure is in these vanity-type drugs that people are willing to pay for,” Digenan said.