Brian Barish of Cambiar Opportunity Fund

Late last year the managers began investing in drug maker Wyeth (WYE), which is now another of its top ten holdings. The stock, which has been trading for about 13 times projected 2004 earnings, is as cheap as its been in the last 20 years, Barish says.

Wyeth has been pulled lower because of lawsuits related to its recalled fen-phen diet drugs, but Barish thinks the legal challenges are too weak to harm the company.

Wall Street has also been wary of the company because it hasn’t updated investors on its pipeline of new products for a while, according to Barish. Wyeth is due to report on its developmental drugs in June, adds Barish, who hopes the information will serve as a catalyst to boost the stock.

Working in Wyeth’s favor, Barish says, is the fact that, unlike many big pharmaceutical companies, it is not being hindered by the expiration of patents on its drugs.

Just as the managers concentrate their portfolio, they’re willing to make big bets on sectors where they find attractively priced stocks. Health care companies like Wyeth currently account for about 22% of the fund’s assets, Barish says. Holdings include drug makers Abbott Laboratories (ABT) and AmerisourceBergen Corp (ABC); drug store chain CVS Corp (CVS); hospital operator HCA Inc (HCA); and Medco Health Solutions (MHS), which manages prescription drug programs for companies.

Valuations for these kinds businesses have become “disconnected from the fundamentals” that they’re “likely to enjoy over the longer run,” as well as from their historical ranges, Barish says. In addition, probable interest rate increases by the Federal Reserve have begun to make these stocks look good to investors seeking defensive investments, he says.

Within the group, an investment Barish finds the “most intriguing” is British drug maker GlaxoSmithKline plc ADR (GSK). The company’s depositary shares carry multiples that Barish think are unreasonably low in light of the value of Glaxo’s well-known products like Advair, an asthma medication. Barish also is high on the company because of a cholesterol fighting drug it is developing that he believes could become a blockbuster.

Approximately 19% of the fund’s holdings are in financial services stocks. These consist mostly of insurance companies, which Barish says have benefitted over the last couple of years from their ability to raise prices for property and casualty coverage. Although their pricing power has probably peaked, they should reap gains from past hikes for a while, Barish reasons.

The fund owns ACE Limited (ACE), Allstate Corp (ALL), Conseco Inc (CNO), and St. Paul Travelers Cos (STA), among other insurers.

The managers will trim a holding or eliminate it from the portfolio if a company’s financial fundamentals erode, or its stock reaches a certain price, or becomes too pricey. For example, the managers unloaded retailer May Dept Stores (MAY) between January and March this year in order to take profits in the stock, Barish says.

The fund’s turnover rate over the long haul is about 40%, Barish says. However, it has been much higher in recent years because of occasional sharp increases and decreases in the fund’s assets triggered by stock market volatility.

Assets dipped to about $6 million in June 2001, rose to $40 million by early 2002, then retreated to $20 million by the end of that year. They started to rise again in March 2003, Barish says.

Assessing the U.S. stock market, Barish says he wouldn’t be surprised if it ends the year flat, or up or down by only 2%-3%. He believes how stocks perform will depend on the Federal Reserve’s monetary policy.

“I think the issue is not whether the economy is good — the economy’s great,” Barish says. “The issue is: What kind of interest rate environment are we going to be looking at by the second half of the year?”