James Barrow is betting on energy stocks such as Chevron and ConocoPhillips to lead Windsor II, Vanguard Group's largest actively managed...

Share story

James Barrow is betting on energy stocks such as Chevron 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 (P/E) 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,” said Barrow, from his office in 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.”

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks

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 has managed Windsor II since its 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.

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.

Dividends have increased as well. Chevron has boosted its payout by 38 percent since buying Texaco 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 merged with Phillips Petroleum in September 2002.

Outside the oil industry, Barrow’s holdings include Pfizer, the world’s largest drug maker. 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.

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.”