With its 40th anniversary this month, Vanguard Group's Windsor Fund is one of the longest-running acts on the mutual-fund stage. Successful, too: Since its inception, Windsor has returned an annual average of 12.95%, vs. 11.72% for the Standard & Poor's 500-stock index. But lately, the $17 billion fund is hurting, down 20% in the past year, vs. the S&P 500's 3% gain. With the fund closed to new investors, more money has been flowing out than in.

Despite that, Vanguard Chairman John Brennan says the firm is sticking by portfolio manager Charles Freeman, who was assistant manager from 1969 through 1995, then took over the reins in the beginning of 1996. What does Freeman have to say for himself? Senior Writer Robert Barker reached him recently by phone at his suburban Philadelphia office.

On Windsor's woes: If you look at us right now, we have a very different kind of portfolio. We are way underweighted in the big caps. Only about 18% of the fund is in the 50 largest caps [in the Standard & Poor's 500], which are about 52% of the S&P. We are overweighted in cyclicals, which depending on how you count them are as much as 60% of the fund--a good deal higher than the market. And then finally we have beaucoup midcaps and small caps.... All three of these have been the wrong place to be in the last 11 months. That's our period of pain.

On the stock market's leaders: The dirty little secret is getting out that these large caps that everybody ran to because they were uncertain about the economic landscape, that they ran to because they were safe, have some cyclical exposure...DuPont. 3M. Walt Disney. Now, of course, the consumer-products companies are also exposed: Gillette and Coca-Cola and Procter & Gamble.

On a possible comeback: We're looking in the next 12 months for....a different kind of market that is less scared and more confident....It can start thinking about all different kinds of stocks--not just the big caps, not just defensive names but...cyclicals, small stocks, midcaps. When you get this kind of broader market background, that's Windsor Time.

On fears of deflation and a liquidity crunch: The U.S. economy has already taken a real good shot from Asia exports....There are going to be tremendous sales, sure, with some impact on travel and technology spending, but basically we see the domestic economies of the U.S. and Europe holding together.

On Citigroup, a big holding: We're very enthusiastic about the synergy of the two corporate businesses [Citicorp and Travelers Group] merging together.... Clearly, the emerging-markets crisis is penalizing Citi's stock price. Whatever your concerns about Citi's international exposure, they've been at this a long time, they kind of know their way around all this and, in fact, in the end benefit from a flight to quality and a reduction of competition.

On First Union, another big bank holding: Of the domestic banks [this probably] has the best internal growth rate, which we make to be about 10% or 11%. They have very strong capital management and capital markets businesses.

On Rhone-Poulenc, a major drug and chemical holding: Here's the stock at $44--and recently it has been as low as $38, where we added to our holdings--because it got caught up in Europe's concerns about cyclicals. Europe kind of forgot that this was a changed company. And we've got cash earnings in 1999 for Rhone-Poulenc of $3.10, so it's less than 15 times earnings. That same package of businesses in other companies commands anywhere from 25 to 35 times.

On whether he bought many of these stocks too early: Yes, yes, yes. The market has been down on cyclicals for a good long time....We never believed that Alcoa would get as low as it is or that Caterpillar would get as low as it is. They shouldn't be--they're severely undervalued in our judgment. So, early we were. But basically, the same portfolio we've suffered with...we think is a winning hand for the next 12 months.

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