Q:  What is the history of the fund? A : The Virtus Real Estate Securities Fund was launched in 1995 and currently has $1.3 billion in assets under management. Q:  How is real estate asset allocation beneficial to the investor? A : The advantages of the listed real estate securities class over private real estate include broader diversification and, based on NAREIT studies, stronger long-term performance on average, as well as higher liquidity, allowing for strategic investments and rebalancing. The fund provides exposure to high quality commercial real estate through the listed marketplace, so both individual and institutional investors can benefit from an allocation to the fund. Q:  What core beliefs constitute your investment philosophy? A : We believe that a real estate security’s intrinsic value goes beyond the value of the underlying real estate and, therefore, we rigorously employ the investment style based on growth at a reasonable price. That gives us the freedom to assess the merits of each investment in the context of the macro environment, the sector dynamics, the growth opportunities and relative valuation. In addition, we think there are certain fundamental research opportunities to uncover and market inefficiencies to exploit. Q:  How do you structure your investment process on the basis of this philosophy? A : In the early part of our process, we try to shape views for the benefit of the portfolio and the preliminary sector positioning as it relates to the 12 property sectors that are available within the U.S. listed real estate security space. We carry out long and short term analysis in three dimensions – space market based on the underlying occupancy in a given building; the demand for the space in a building, in other words whether it is expanding or contracting; and the pricing power that the landlord may or may not have depending upon where occupancy is and the specific real estate cycle for that property type. Then, we combine that with our view on the asset market and what the underlying value of the asset might be, the general trends in terms of the appreciation or depreciation of the value of the underlying asset. Additionally, we incorporate as a third dimension our views on the listed security marketplace. Within the space environment we are looking at macroeconomic trends, supply and demand fundamentals and specific factors relating to those markets and submarkets. As far as the asset market is concerned, we look at the cost of capital and macroeconomic trends, both in terms of debt and equity capital, the dynamics and the underlying trends and drivers. We also follow the volume of transactions in the private marketplace, the pricing of those transactions and the drivers behind them. At that stage we want to understand what we may anticipate going forward, and part of this projection includes an assessment of sentiment on the specific direct property types across the 12 property sectors. From a listed dynamic perspective, there is certainly a number of trends to track. By assessing the valuation drivers and the sentiment toward the listed real estate itself, all of the factors help form an initial stake in each of the property sectors we are looking at. As a further step, our process continues with a thorough screening of the investable universe, both in terms of market cap and proprietary growth at a reasonable price. When we take the underlying universe into consideration, we explore five areas including management and specifically the management acumen, the evolution of a defined management strategy and a track record of its execution, as well as the capacity of human capital to implement their strategy. In addition to management, we spend a significant amount of time with the underlying real estate assets in the property portfolio, not just on the physical quality and maintenance, but also in view of the staffing and the talent as well as the strategy at the portfolio level for those assets. The next step in the process takes an extensive look into the cash flow drivers, evaluating the internal and external drivers of growth and to what extent the balance sheet can help drive that cash flow growth appropriately. With regard to internal growth, we are scrutinizing the factors that drive occupancy change, the underlying lease duration and more specifically the level of maturities at different points in time. We review the level of rents in place compared to the market and the level of rents expiring at future points in time versus the market and analyzing those across the revenue drivers. When it comes to external growth, we have noticed that this is often achieved through one or a combination of sources such as acquisitions at the individual asset level or of a portfolio of assets. We also consider the redevelopment and development opportunity sets that may be available. The combination of all these characteristics helps drive cash flow effectively, and that cash flow assessment enables us to determine critical factors in terms of our price and valuation work. To focus on the free cash flow of the firm, we use a discounted cash flow methodology. A number of proprietary inputs will ultimately help us drive along with some other factors an overall assessment of the appropriate value for a given security. Our process continues with a significant amount of proprietary modeling and field research, which play special roles in clarifying our research assumptions and in helping with the portfolio construction. On the modeling side, we build and maintain proprietary models and stress test our assumptions across key factors. All members of the team, including myself, are actively engaged in field research to help clarify our underlying modeling assumptions. In so doing, we seek to validate the quality and maintenance of the underlying real estate assets. We interact with the local, regional and the senior levels of management to find what strategy they are articulating – is it a shared strategy across all levels of management, or a specific strategy for that particular time or property sector at a particular point of the real estate cycle? Q:  What is your research process? A : From a research standpoint, we have a team-oriented culture and our professionals have extensive years of experience. Our team benefits from a significant amount of input going into our process, the vast majority of which is on an internal basis. In terms of portfolio construction, we actually synthesize our growth-at-a-reasonable-price research before we integrate the research findings. Since our analysts recommend security weights based on their coverage, the team spends a significant amount of time debating and analyzing the underlying inputs and suggested weights, which eventually helps us to move forward in the portfolio construction. Q:  Would you give some examples to better illustrate your process? A : The first example comes from a property sector perspective and what we often see in cycles related to apartments. Normally, the apartment property sector has increasing traffic in spring which continues through summer, slows down in fall, and then softens into the winter months before picking up again the following spring. As a result of that pattern, a property manager in apartments often has a cycle of occupancy that modifies itself throughout the year in line with what was described earlier. One of the things that we found interesting in our regular property tours across a number of apartment REITs was that in the summer of 2009, going into the fall, the occupancy levels were holding up better than they typically would. Therefore, we were convinced that in the beginning of 2010 apartment REITs would be better positioned to raise rents sooner. And indeed, that turned out to be the case just as we had expected. That is a classic example of an inefficiency in the marketplace that we can exploit through our extensive research. In terms of specific securities, I would like to highlight Extra Space Storage Inc., a real estate investment trust that provides self-storage services. This high quality business with the highest rents per square foot in self-storage has been a multi-year overweight self-storage holding of ours. We were able to determine through regular property tours that there was a significant improvement in their underlying asset positioning and operations. Moreover, when Spencer Kirk took over as CEO, we felt that he succeeded in leading the organization to the next level as an outstanding self-storage REIT with the best systems, the most innovative platform, and the highest rents. He is leading the third-party management opportunity set as well as the acquisition pipeline within that space. Next, I would highlight Taubman Centers, Inc., a mid-cap and a regional mall REIT with a very strong positioning among the country’s regional malls with the highest rent per square foot and sales per square foot. Taubman had actually enjoyed a string of nine consecutive quarters of double-digit sales per square foot growth, and that is even excluding the Apple stores. These figures undoubtedly reveal the high productivity of such regional malls and the wonderful experience they provide to shoppers and tenants. As a representative of regional malls, Taubman is a multi-year, overweight holding in our portfolio. Q:  How do you build your portfolio? A : After an initial screening of 120 names from the universe based on market cap, we bring the number of portfolio candidates to 100 names. Then, we apply our growth-at-a-reasonable-price screening to dive much deeper into the remaining pool of potential holdings. We build a portfolio within the range of 25 to 45 names and we currently have 34 holdings. From an a sector exposure perspective, we keep individual sector weightings to less than or equal to two times the benchmark level. For benchmarking purposes we use the FTSE NAREIT Equity REITs Index. In terms of our guidelines, we generally keep our turnover to below 50%, but the three year average has been closer to 30%. Q:  What are the primary risks that you seek to mitigate in the portfolio? A : Among the risk characteristics that we evaluate in our strategy are individual security, portfolio structure and product size. We monitor these characteristics on a relative basis regarding external and internal growth as well as the balance sheet strength. It is of primary importance for us to assess balance sheets not just with the level of leverage in mind, but also depending on a multitude of factors such as the capacity to fund a plan, the structure of the leverage, the level of fixed versus floating rate debt, the maturity schedule that debt faces going forward, the specific rates of in-place debt and how those levels are maturing versus what is available in the marketplace at a given time and how that aligns itself with the strategy of the company. As regards the portfolio structure, we constrain sector exposure to not more than two times the respective benchmark weight and we will also permit zero weights of a property sector. From a standpoint of product size, our team does target maximum assets under management at roughly 1% of the benchmark’s value for a particular strategy to make sure we can achieve our team’s key performance return objective. As a whole, risk management is overseen by our chief risk officer together with members of the risk team. The risk management group works closely with our chief investment officer and our compliance department to review, implement and monitor the underlying portfolios in terms of risk mitigation. In addition to scrutinizing our portfolio for risks associated with exposure, style and discipline, we use third-party attribution and analytics as part of our continuous efforts to monitor risk at any level.