For the last three years, making money in the markets has been easy -- if you just kept your money in oil, commodities and emerging markets. But is the long ride coming to an end? One of America's top mutual fund managers says it might be.

"It certainly has the potential to be over," says Manu Daftary, manager of the ( QUAGX) Quaker Strategic Growth Fund. "I don't know if it's over for certain, but the market is saying it may not be as good as it used to be. Commodity cycles tend to last about three years."

If the cycle trend continues, that would suggest 2007 will be different from the previous three years. That is particularly bad news for emerging markets that reaped the most benefits from the commodity boom, such as Russia and Brazil.

Daftary's fund finished the year up 5.13% compared with the S&P 500's 14.15%, ending his streak of eight consecutive years of beating the index. But he is already making broad changes to his portfolio to position himself for 2007 and beyond.

Once a big energy bull, he has now cut his investment in the sector and in commodities as well. But he still wants to maintain some holdings in the energy stocks. He believes sentiment toward the sector is so negative that any positive news -- even a decent cold snap -- could give them a healthy trading bounce.

Daftary is now seeking bargain growth stocks across all sectors. "We needed to diversify and not take such big sector bets, which is what hurt us last year," he says. "So we're more diversified now into more kinds of stocks. I'm looking for more defensive companies, where we think they can grow their earnings across the economic cycle."

In particular, he's looking for companies using the GARP approach, or "growth at a reasonable price." This is the strategy of investing in companies that have growth potential and are relative bargains.

"When the economy slows, we try to buy companies with great free cash flow," he says. His biggest holdings now are defense contractors General Dynamics ( GD) and Lockheed-Martin ( LMT), hospital giant United HealthCare ( UNH) and General Electric ( GE). In total, stocks related to the health care industry now make up 12% of his portfolio. He also likes Rupert Murdoch's News Corp. ( NWS), which he calls "a back way to play the Internet" because of its stake in MySpace.

"We've got a balanced portfolio because we just don't know where the winners are," Daftary says. One big growth story he sees for 2007 is in the biotech industry. He says the sector was neglected last year because money flowed out of growth funds and into value. "These stocks look so inexpensive," he says. "People have ignored them."

His favorite biotech stocks include Amgen ( AMGN) and Wyeth ( WYE). "Suddenly people are waking up to the fact that Amgen is going to create $18 billion in free cash flow over the next few years," he argues.

In retrospect, Daftary admits he got drawn into riding the commodities boom for so long that it started taking over strategy, and hopes to learn from his mistakes. "Last year was disappointing for me," he says. "We stepped out of our level of competence, and we're going back to what we do best: We're stock-pickers."

At the time of publication, Arends was long Quaker Strategic Growth Fund, although positions may change at any time.

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