By Junius Ellis

(MONEY Magazine) – What's the surest way to stay invested in today's increasingly risky market? Here are unvarnished answers from none other than John Neff, 62, the renowned manager of Vanguard's $11 billion Windsor Fund who's earned prodigious returns from seemingly stodgy blue chips with low price/earnings ratios and high dividend yields. In fact, since 1974, Neff has suffered only one losing year (1990) at Windsor, which over the period compounded in value 29 times. That's nearly double the S&P 500 index's fifteenfold rise. More recently, he recommended 11 bargain-priced stocks in MONEY's September 1991 issue. If you had bought them all, you would have earned an awesome 67% -- triple the S&P 500's 21% rise (see left). And now? "You could see the Dow decline 15% to 20% before bouncing back to end 1994 slightly ahead," says Neff in his office in suburban Philadelphia. "The pullback would actually be healthy in that it reminds complacent investors there's still risk in owning stocks." Signs of a pricey market include its aggressive earnings multiple, lately 17 based on Neff's forecast for '94, and miserly yield of 2.7%. In contrast, stocks in his Gemini II fund (see below) sell for just 10 times profits and yield 4%. Neff also fears inflation's feeble 2.4% annualized rate at year-end will flare all the way to 3.5% or 4% by December in step with resurgent commodity and oil prices. Still, he figures stocks can recover, thanks to respectable growth in the economy (averaging 3% annually through '96) and in corporate earnings (up 8% a year). Although Windsor has largely been closed to new shareholders since 1985, you can still invest with Neff through Windsor's closed-end twin, $348 million Gemini II, which he also manages. This quirky but rewarding fund has two classes of shares traded on the New York Stock Exchange. One takes all of the fund's capital gains or losses, while the other gets the income. And the capital shares' recent three-year return of 29% annually beat both Windsor's 21% and the S&P 500's 16%. Gemini capital holders did even better in 1993, earning 34% relative to Windsor's 19% and the market's 10%. Neff thinks these capital shares (ticker symbol: gmi) are a steal at a recent price of about $19, a fetching 14% discount to their NAV (net asset value per share). "Hell, I've got $1 million of my own money riding on both classes of shares," he adds. Reason: In less than three years' time, the fund becomes open-ended, redeeming shares at NAV and thus erasing the capital stock's discount. So investors who hold that long are protected against losses of as much as 14%. Another way to invest with Neff is to buy his favorites among banks (his top sector at 20% of Gemini), insurers (11%) and convertible securities (27%). Regional bank bargains. This stock group, says Neff, has been unduly depressed (down 13% since last April) by concerns about higher interest rates. The problem is that rising short-term rates can quickly shrink banks' plump net margins by narrowing the spread between what they pay for funds (3.25%) and charge for, say, prime-rate loans (6%). But Neff believes that his four pet regionals "can effectively overcome this profit squeeze by making more loans, particularly higher-rate consumer loans, in their expanding local economies." His four picks: First Tennessee National (FTEN; $39; yielding 4.4%), a $9.6 billion (in assets) sunbelt bank based in Memphis; $71 billion First Union (FTU; $41; 3.9%) and $158 billion Nationsbank (NB; $49; 3.8%), both based in Charlotte, N.C.; and $33 billion KeyCorp (KEY; $38; 4.1%) in Cleveland. Neff is counting on them to deliver lively five-year earnings growth of 10%, brisk dividend growth between 12% to 14% a year -- and stock appreciation that could average 35% in '94. Cigna Corp. (CI; $66; 4.6%). Many analysts dislike this multiline insurer because 37% of its $14 billion premiums comes from the loss-plagued commercial property/casualty sector. But Neff expects that business to improve this year and next, revealing dramatic profit growth mostly from Philadelphia-based Cigna' s thriving managed-care medical plans, the third largest in the U.S., with 3 million patients. Neff figures earnings can surge 50% in '95, when the stock could hit $100, a nearly 52% gain. Advanced Micro Devices convertible preferred (AMD; $50; 6.0%). Neff says the preferred is a coward's way to bet on Sunnyvale, Calif. chipmaker Advanced Micro, with $1.6 billion in sales. At issue is whether the firm can artfully dodge copyright lawsuits brought against it by Intel, the sector's $9 billion behemoth. Lots of investors disagree; AMD's $21 common stock is down 36% from its high last April. Even if they're right, argues Neff, he's comfortable owning AMD because of its almost $500 million cash hoard (enough to weather an adverse judgment). He's also banking on AMD's growing popularity among computer firms, like Compaq, eager to break their dependence on Intel chips. "If, as I hope, the court soon rules largely in AMD's favor," he says, "the stock could jump around 50% and the convertible 30%."

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: NEFF'S TOP PICKS FOR 1994 John Neff favors five financial stocks plus one convertible preferred issue. They are ranked here by their projected '94 share-price appreciation (except where noted).