Q: What I found interesting about the portfolio is that 50% of the assets under management are concentrated in only 10 stocks. Why? A: We usually run a fairly concentrated fund, certainly relative to the funds at AIM and also relative to our peers. I would make the one point that probably it's less so relative to our peers, i.e., the other health and biotech funds, because being sector funds, I would say most of the peer group tends to have fairly concentrated positions, 3-, 4-, 5% for their largest holdings. Although it is fairly concentrated, I would say it’s a little bit more concentrated but not considerably so. Q: The merger of Pfizer and Pharmacia creates by far the largest pharmaceutical company in the world. Do you think it will work out? A: That deal was completed in April and Pfizer, the surviving company, is by far our largest position. At some point we'll probably reduce that position somewhat. But, I would say that far and away Pfizer is my number one idea in the pharmaceutical universe. Given the strength of the company on a variety of different fronts, combined with an extremely attractive valuation, I'd say it's a very safe and secure holding and should be poised to be a strong relative performer. Pfizer should see 15 to 20% type earnings for the foreseeable future. I think there is very little risk to them not achieving that number because of the strength of both their diversified top line revenue but also the scope that they have for additional cost cutting with the Pharmacia integration. When you combine that with the valuation of the stock where Pfizer is trading about 17 times this year's earnings and 15 times next year's earnings, historically, a company of this quality to trade at no premium or in fact a discount to the market multiple I think is fairly rare. I think to buy Pfizer at 17 times earnings with a 2% dividend yield given where the market is trading, is an exceptionally attractive buy. Q: Based on your experience since 1994, do you feel comfortable owning a large number of foreign issues? A: Actually, I've been in this field since 1991. I started my career with Franklin Templeton covering healthcare before coming to GT Global in 1994 where I worked on the healthcare fund. GT Global was acquired by Invescap in 1998. The healthcare fund I was managing at that time became the AIM Global Health Care Fund. I've been working on this fund since 1994 and lead manager since 1996. In terms of the foreign holdings in the fund, I would say we definitely have one of the highest exposures to foreign healthcare stocks. Primarily those are foreign pharmaceutical stocks because that is primarily what you have outside the U.S. The reason for that is that we think the valuations look very attractive. In the last six or seven years I've been managing the fund, we've generally kept between 15 to 30% in foreign stocks. That has actually hurt our performance for the first few months of this year. One is we have a fairly high weighting in Japan, a little over 8%. Secondly, we have two companies that are hybrid chemical pharmaceutical conglomerates, Bayer and Akzo Nobel. We built positions for the same kind of reasons. One is that the valuations on a price to cash flow basis, both stocks were cheap. We thought the valuations were already reflecting bad news. Secondly, we thought these were good companies to own as somewhat of a hedge to the rest of the portfolio in the sense that the chemical components are more cyclical and more leveraged to an economic recovery than other healthcare stocks. The third thing in terms of foreign holdings is we also have a large weighting in two French stocks, Aventis and Sanofi. We still think those stocks are attractive and the valuations are far too low given the fundamental outlook for both companies. Net, we are at the high end historically with our foreign holdings but we are comfortable with that and we think those companies provide very good value. Even though they have worked against the fund year-to-date, we think that their relative performance going forward is going to be very strong so we feel comfortable and confident in holding those positions. Q: Patience should pay off in the long run. A: It should, hopefully. Stocks are very funny things. When stocks are going down it makes you want to sell them because you extrapolate the present and just think they're going to keep going down even though all things being equal, the more they go down the more attractive they should be because the cheaper they become and the more upside they have when they start going up. So, sometimes it pays to be patient. Q: Since you invest in companies all over the world, how close are you to the managements? A: We try to be as close as possible to the management teams. What we're primarily doing, of course, is running a bottom up, fundamentally driven structured portfolio where we want to own names where we think there is good risk-reward because the fundamentals are good or improving and the valuations do not necessarily reflect that. And the way we conduct our research primarily is to sit down with the companies and go through their stories one by one. We're fortunate because we're part of AIM and secondly we run a fair amount of dedicated healthcare money, so we have for the most part very good access to management teams. I am based in San Francisco and we meet with management teams here in our office just about every single day. That's the primary way. We team that with conferences and with academic medical meetings. My analyst goes to quite a few of those. There is a good report with the sell-side research community. You try to tie all those things together to know the companies as well as you can. Also, we are aware of the general thinking of the companies on the Street as well in trying to figure out what are the correct valuations for the stocks. We have five fund managers in the San Francisco office and seven or eight analysts that are part of the AIM team. I have one analyst who is completely dedicated to working on healthcare. We have a few analysts who work on other funds that occasionally look at healthcare. In terms of day-to-day responsibility and management of the fund, it's my analyst, Sunaina Murthy and I. Q: Why do you like hospital facilities companies? A: Hospitals also hurt us this year. Hospital companies helped us quite a bit in the last few years. What happened is the Balanced Budget Act of 1997, basically Medicare cut too much from hospital reimbursement. What happened in 1998 and 1999 was a really hard time for the industry. Medicare ended up with giving back provisions where they increased reimbursements the hospitals were receiving. That combined with other positive operating fundamentals helped turn the tide in the operating environment for the hospital group. The stocks worked very well in 2000 and 2001 and into 2002. Then in the past six months, the stocks have performed very poorly, primarily because of the controversy surrounding Tenet Healthcare. Basically they had been overcharging Medicare for certain types of patients. That was the first thing that happened. Subsequent to that in the past two months or so, there have also been some earnings misses by some companies for a variety of different reasons. Investors have soured on the group. The price earnings multiples for the stocks have really collapsed from the 20 to 30 range down to the 10 to 15 range even though earnings for the most part have not come down much. Given that PE compression, the stocks have hurt us quite a bit, but we actually think, again, for the most part, investor sentiment has swung too far in the other direction. We still think the industry is a good one in terms of the long-term growth and we still think the earnings stream is fairly stable. These are not cyclical companies. The earnings may miss by a penny or two here and there in some quarters, but basically these are growth companies and earnings will continue to grow higher over the next few years. We think multiples down to the 10 to 11 range are far too low and we think they are attractive at these prices. Although the hospitals have hurt us, we are maintaining our positions in those companies. Q: Are there some encouraging signs from the Food and Drug Administration that could affect the fund in the long term? A: I think there are some positive and some negatives with regard to the changes at the FDA in the next year or two. Overall, we finally have an FDA commissioner, Mark McClellan, after two years without one. More specifically, in terms of the dynamics of what is going on with regard to winners and losers, it looks like companies with differentiated products, the changes have been positive because Dr. McClellan has stressed the importance of getting novel therapies approved and available even if, in some cases, perhaps the efficacy is not yet firmly established or there is arguably marginal efficacy for certain new drugs, particularly cancer compounds, for example. There is kind of a ground swell of support to get these products on the market and let doctors and patients have access to them, even if perhaps they haven’t rigorously proved their efficacy. That would be a positive for some of the biotech companies and some of the drug companies that really need to see their new compounds get to market. Another issue is that they may streamline to some extent getting generics on the market. There is a host of different issues involved with this such as streamlining and clarifying what the patent laws are. If you net everything out, it probably looks like the whole process will be simplified somewhat to the benefit of generic companies and somewhat to the detriment of the large pharmaceuticals. Again, it really varies by company. In some cases, there may be some large drug companies that may benefit because their patents may be more robust. Q: The medical equipment companies have done well since making lows last July. Do you have an explanation? A: I guess the largest single contributor to the strong performance have been the fundamentals. The sector, medical technology, medical devices, is kind of hard to generalize about because there are so many kinds of companies selling different kinds of products that don't compete with others necessarily. The whole medical device area has performed well due to meeting or in fact exceeding estimates and showing very healthy, robust earnings growth rates of 15 to 20% and in some cases higher. That has been accompanied by a multiple expansion for the group where you now have many of these companies trading at 25 to 35 times earnings from 15 to 25 times earnings a year or two years ago. If we had to generalize about the industry, it is a good industry in the long-term for investors. I think that the valuations, given that this has been the best performing space within healthcare in the last couple of years, are a little bit stretched. I think on a short-term basis, to generalize, there are more attractive places in healthcare outside the med-tech area. Q: The interview so far is hinting that you're more of a value manager rather than one who prefers high growth. Is this due to the fund's large size relative to its peer group? A: I would say that is correct. I don't think it hinders the performance. It does make it more difficult to establish large, meaningful positions in very small companies. It may take quite a while to establish a 1% position. With the smaller companies, we often buy a large amount of stock when the stock sells off substantially on a piece of bad news or a bad clinical event or some other reason where we feel the stock has actually over discounted whatever the bad news is. Those opportunities usually are times when the stock trades at a large volume so we can actually establish a sizeable position. But, in terms of doing very short-term trading, that kind of thing is more difficult to do in size, obviously, because you can't move that much stock around. Q: Does the turnover rate fluctuate a great deal? A: I would say actually this year it's going to be under 100%, depending on what happens over the balance of the fiscal year because a lot of stocks we bought have under performed, but we think the fundamentals are actually going to be more attractive. We haven't done a lot of selling. I would predict our turnover is going to be quite a bit under 100%. Historically it's been higher than that. We have at times traded somewhat aggressively in terms of trying to benefit from shorter term price movements as well as we have really tried each year, the last few years, to minimize or eliminate any capital gain payout. That has resulted in some extra-higher turnover to realize capital losses wherever possible.