Donald Baxter of Philadelphia Fund

For example, last February, he added cereal producer Kellogg Co (K) to the portfolio. The company’s overseas business has gotten a boost in recent months because of the lower dollar, he notes. Beyond that, Kellog generates high returns on equity, and the P/E multiple of its stock is “not terribly unreasonable” by “today’s standards,” Baxter says. The shares are trading at about 19.5 times trailing 12-months earnings, and about 17.6 times projected earnings over the next year, he says.

In February of 2003, Baxter took a stake in another food company, Heinz (H.J.) (HNZ), which he says has many of the same attributes as Kellogg. Additionally, Heinz grows steadily, and its well-known brand name enables it to garner higher returns on capital than competitors whose products are not as easily recognizable, Baxter says.

The No. 1 stock in the fund at the end of the second quarter was SouthTrust Corp (SOTR), which operates banks in the South and Texas.

About 80% of the fund’s stock assets currently are in of banks, utilities and oil companies, and many of those holdings have been among his biggest winners this year, according to Baxter.

Southtrust has gained nearly 20%. The fund’s top performer has been TXU Corp (TXU), a gas an electric utility whose shares have appreciated about 70%. Another utility, Sempra Energy (SRE) has gained 21% while Occidental Petroleum (OXY), an oil and gas driller, has seen its stock appreciate by about 18%.

Because he avoids expensive stocks and companies that don’t pay dividends, Baxter says he typically shuns the technology sector.

All told, the fund currently has about 81% of its assets in stocks. Another 12% is in intermediate-term Treasuries and the rest is in cash.

The defensive nature of Baxter’s holdings results in a fund that tends to be less volatile that its peers. For instance, the Philadelphia Fund’s beta — a measurement of sensitivity to changes in the market — was 0.40 through the end of June, less than half that of its peers’ 0.93.

Also, the fund’s standard deviation, which measures the variability of returns, was 8.68%, compared to 16.16% for similar funds. Low standard deviation readings indicate returns have been less volatile.

Contact Robert F. Keane with questions or comments at: [email protected].