The manager of Vanguard Selected Value, which invests in undervalued midsize companies, says this is a great environment for his fund. Valuations between traditional growth and value companies have been compressed, says Jim Barrow. This means that he can find quality, growing companies at value prices. "As a value manager, we're able to pick up former growth companies at low multiples," he says.

Selected Value has returned a solid 21% over the past year through April 5. But Barrow, co-founder of Dallas-based sub-adviser Barrow, Hanley, Mewhinney & Strauss, thinks performance could have been even better had he not underweighted or ignored completely four sectors that are prominent in most mid-cap indexes: real estate investment trusts, utilities, brokerages and commodity-related stocks.

However, he's not about to start chasing these hot sectors now. Says Barrow's co-manager Mark Giambrone: "REITs could have a 25% correction and still be overvalued." Barrow concurs: "REITs will go down." (Donald Smith & Co. manages 20% of Selected Value's assets.)

So what do Barrow and Giambrone like? They purchased shares of MasterCard right after its initial public offering last year. Barrow likes American Power Conversion, maker of electric surge-protection equipment. And he favors Advance Auto Parts, which caters to lower-income drivers in need of car repairs, and Royal Caribbean Cruises, which serves affluent folks. An inveterate investor in tobacco and oil stocks (Barrow also manages Vanguard Windsor II, another superb fund), he holds Murphy Oil and such tobacco stocks as Carolina Group and Reynolds American.

Selected Value (symbol VASVX) has delivered superb returns since Barrow and team assumed control in March 1999. From then through March 31, the fund gained 14% annualized, beating Standard & Poor's 400/ Citigroup Value index by an average of two percentage points per year and clocking the S&P 500 by an average of 11 points a year. A rock-bottom expense ratio of 0.45% contributes to the strong returns.

If you can cough up Vanguard Selected Value's steep minimum investment of $25,000, this is a fine mid-cap fund for your portfolio.

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