By Herbert Lash

NEW YORK (Reuters) - Some things hardly change for money manager David Winters.

Tobacco companies remain a portfolio stalwart, he still fears inflation and remains a train buff, a hobby that gives him an eye into the economy.

Yet Winters, who built a reputation as a distressed debt specialist and shareholder activist, is now content to pick stocks, a sign of the opportunities he sees in equities and the economy's strength. Stocks are out of favor, he said.

The shift is important because Winters' Wintergreen Fund <WGRNX.O> has a number of hedge fund characteristics, allowing him to short stocks, buy stock options or do risk arbitrage, among other investment strategies.

Winters has been boosting the quality of the companies he owns and calls his current portfolio the best ever, which he attributes to fear among Americans to own stocks, both at home and especially abroad. That fear has created an opportunity.

"The thing that's so amazing is that you can buy fabulous companies, fabulous businesses at cheap prices because people don't care. They're all hiding in cash," he said.

Winters' style runs counter to the short-term vision that dominates Wall Street. But he has beaten all rivals in the large-cap core category over the past one- , three- and five-year periods, according to Lipper Inc, a unit of Thomson Reuters Corp. He also beat 95 percent of his Morningstar peers when he managed the Mutual Discovery Fund from 2000 to 2005.

So far this year, Wintergreen is lagging most peers.

Wintergreen is now mostly invested overseas, where more than 70 percent of the $1.4 billion fund is allocated even as U.S. rail freight is up, a harbinger of a growing economy.

Winters has sought out companies that earn in different currencies to mitigate the effect of the Federal Reserve pumping enormous sums of money into the U.S. economy, which he believes will keep the dollar weak and spur inflation.

"The future is incredibly bright. It's just not as bright in the developed world because there's a lot of debt and we're mature so we can't grow at big rates of return," he said.

Over time, Winters has diversified more and more out of the dollar. He's been adding to his Canadian oil and gas names -- Birchcliff Energy Ltd <BIR.TO> and Canadian Natural Resources Ltd <CNQ.TO> -- which account for about 10 percent of the fund. He also likes gold as an inflation hedge and owns Canadian miner Barrick Gold Corp <ABX.TO>.

Winters isn't keen on the euro. He favors Switzerland because the government is not fiscally strapped like much of the developed world and he likes Swiss companies.

Nestle SA <NESN.VX>, watch manufacturer Swatch Group AG <UHR.VX> and elevator maker Schindler Holding AG <SCHN.S> are among his top 10 holdings. Switzerland is the second-biggest holding by country, with the United States the largest.

Swatch and Schindler were original holdings when Winters set up Wintergreen in October 2005 after he left as chief executive of Franklin Resources' Mutual Series, where he worked under Wall Street legend Michael Price.

Winters typically holds a stock for five years and often returns to what he likes. He's long favored tobacco companies because they generate lots of cash and pay big dividends. About 16 percent of Wintergreen is tobacco, much the same as 2005.

Winters looks for three traits in a potential investment. A good business with improving economics, international diversification and top-notch management.

"The biggest and hardest lesson I've learned, and I've learned it a couple of times, is management is critical," he said. "The big winners have been the people who ran the company did a swell job."

(Reporting by Herbert Lash; Editing by Leslie Adler and Dan Grebler)