Q:  What is the history and mission of the fund?

As a team, we go back to the Julius Baer Group. From those days our strategy has been to create value in a consistent manner. We try to create an all-weather fund that will do well in a recession or do well in an economic growth cycle, whether emerging markets are doing well or doing badly, or whether values are in vogue or growth is in vogue. We’ve done well our first 14 to 15 years. With asset growth our team grew, and then the challenge of continuing to execute the strategy was daunting for us, because we failed to translate it from a narrow, small team to a bigger team. Now with the newly-launched R-Squared Capital we’re back to a size slightly bigger than we were at Julius Baer. With a smaller team, we feel we can better execute our strategy, in terms of being consistent. We are investing in the international market, which is everything outside the U.S.

Q:  What’s attractive outside the U.S.?

Two things. One, economic growth outside of the U.S., on average, should be higher than in the U.S., because the U.S. is the most developed economy, and you would expect underdeveloped economies to catch up with the U.S. Two, the best corporate governance is in the U.S., so when you invest overseas you also have a hidden additional benefit that corporate governance over time will trend towards the U.S. You have two potential sources of capital appreciation. The outperformance is not always there, but over the long-term it should happen and it has been happening for a while. Our philosophy is to create value consistently, over time. We like diversification, which we think lowers your risks and helps you to be consistent over time. We have a bias towards companies or industries that are facing more structural tailwinds, so we look for those structural tailwinds, or we’re looking for values that have a catalyst.

Q: What kinds of stock and company characteristics are you looking for?

You have to look at information through the right prism. Valuation is valuation; a company is either overvalued or it’s undervalued. You make money when you buy undervalued companies and you lose money when you buy overvalued companies. Valuation is a trick. If you only use metrics as your valuation guidelines, it’s going to work most of the time for the average companies. But it’s not going to work for the expensive companies because you’re never going to buy them. And you’re going to have a mixed or terrible record when you buy value names, because they’re going to be mostly value traps. For me, the safest names in the universe are those with great franchises at fair value because your downside risk tends to be limited and over time you have significant upside. The higher the risks and lower the liquidity, the higher the required return I demand, and most likely my value or my weight in the portfolio will be lower than it would be for a similar company with more liquidity and more visibility and better political or sector risk. So it’s always a risk/reward situation.

Q: How do you generate investment ideas and what macro themes do you factor in your outlook?

The ideas come from three levels: Top down, mid-level and bottom up level. Strategy is the big picture, so when you wear a strategist’s hat, you need to look at the world both from a cyclical and structural angle, and you need to have, as the portfolio manager, a certain bias or an idea if there is one. If there is no strategist-level idea. you could say I am agnostic and then your analyst and your risk manager hat will dominate the portfolio. For now, have a big view about the global economy, whether from a regional, sector or global way. If we look at the world, three things strike us. Debt to GDP around the world is at a record high, inequality is at a record high, ageing of population in the developed economies is again at a record high. These three things are big inhibitors for really high or even normal growth, so we expect to have very low growth rate in the world for the foreseeable future. That is also reflected by having zero-interest-rates in many countries and almost-zero-plus on many long bonds in Japan, Germany, Netherlands and Switzerland. And looking for a value with the catalyst, a catalyst could be at the sector level, it could be at the geographical level, or it could be at the company level – the company doing restructuring, splitting up like we saw with Hewlett Packard and some others. Geographically, a few countries have done some kind of structural change. India and Indonesia are two countries with elections and with leaders that are promising and looking and acting so far in terms of doing things differently. But these countries need to do a real reform in order to be able to attract and turnaround their economies. These ideas in these countries have been working for now, and may continue to work if the leaders continue to execute. In a country like Brazil, the new leader has been basically going the other way and doing more and more government intervention to the economy, which drives away foreign investors. Now sentiment is so bad that Brazil is on our watch list and we’re hoping to see a change after the new election and perhaps a re-rating in the Brazilian equity markets. And then on the sector level, European Central Bank is hinting that they may use sovereign debt as investible. We feel this will be a key catalyst for a re-rating of the European financial industry, which is very cheap on a price to tangible book value. A combination of low economic growth in the Euro Zone and, more importantly, the central bank not able to do it all, is weighing down on stock prices on the sector. We feel like over the next three months, hopefully, if we see some sign from the ECB that the central bank will finally be able to buy sovereign debt as part of stimulus program, then we expect a significant upside in the financial sector. In the European telecoms sector as well, for example, the operators have not been making profits and have not been making the investment compared to the investment being made by the operators in North America. In North America the competition is much less and you have four key players competing for 300 million consumers, while in Europe you have in every country usually five, sometimes six players competing, and that's too many players. The European regulators have acknowledged that there are currently too many players, and they have been sending clear signals encouraging and allowing operators to start to look for consolidation and to reduce the number of players per country. If that’s going to continue, we can see further re-rating in the sector over the next six to twelve months. And then at the stock level, we’ve seen companies making the right decision in terms of acquiring, divesting, inversion, and whatever they can to do to help their own stocks. These things will bias our portfolio construction so we have the big macro view in terms of what style we think is going to work. Then geographically we can tell, either from the macroeconomic environment or from the political or the regulatory environment, a big change that’s going to affect the structural tailwind or headwind in a certain economy or certain sectors. If you have a good company in a good sector but you have bad management, changing the management is the easiest thing to do. If you have a bad company in a good sector it is difficult but not impossible because at least you have a good sector. If you have a bad sector for us that's usually the worst thing to be able to hope to overcome from the investment point of view.

Q: Do you believe in having a country presence or do you prefer everybody in one location here in New York?

We are all located in New York and we do not have geographic location based experts, but sector expertise is important to us. The information is available, especially when you are in a major financial center like New York or London or some other financial hub like in Switzerland. First we have the Internet, we have all these investment banks, and we have all these companies visiting us. I think being all in New York, or in one location in today's world, is the more optimal organization than being an organization where you have a small team in every country.

Q: What is the decision-making process: is it consensus, do you have the final view, how does the compensation structure and the decision-making work?

It’s about ideas and thinking about what to buy, what’s good, and what's not. It is not a monologue, it’s a dialogue, and it’s a team effort. I encourage my team to tell me what they think and I like more when something is against what we are thinking at the portfolio level, as opposed to just confirming what I want to hear. So we encourage independence, free-thinking, even just being a devil’s advocate. We encourage it to alert us to what’s right and what's wrong. We don’t like consensus, so here our first job is to debate and struggle to find where we want to be because we have only one goal. Not who’s right or who’s wrong. The one goal is to make alpha or additional return to the market index for our client. If we don’t make alpha for our clients, we’re going to go home and we’re going to shut the shop. It’s very simple. So we have only one reason for existence: To create alpha. So performance is our boss, performance is our goal, performance is the only reason for anything we say, or for anything we do. There is collective thinking about both the big picture and the sectors, and then we make a decision. The portfolio manager, I’m the one, has the final say on these decisions. Second, at the stock level the analyst will come to me pushing a certain name within the area that we like and their job is to convince me why it is a good investment. They know what our assumptions are so they cannot come up with assumptions that are against what we agreed on from the big macro picture or from the sector picture, but they could have company specific assumptions. My job is to debate and vet that process as the portfolio manager with them to make sure that it is rational and it makes sense to us. Once we are convinced, then it goes into the portfolio. If we’re not convinced, then either we have to convince the analyst or if he’s not convinced, he has to wait until he finds something to disprove us.

Q: How do you go about building a portfolio and what role does diversification play at the sector level, country level or region level?

You try to maximize return while making sure your risk is similar to but not higher than the benchmark. We make sure that we don’t make huge geographical bets or huge sector bets, but we have to have an idea about what our bet is relative to the benchmark so that it’s neither dramatically too high nor too crazy. First, we’re driven by absolute return so we think about which companies I am prepared to buy. Second, if you look at the large cap names or the large sectors in the index, we look at which sectors are the most interesting to us. For example, let's look at five of the 10 super sectors: Commodities, financial, utilities, telecom and technology. We try to rank the sectors, according to which ones are more interesting than the others. These rankings create these kinds of biases and then it is an elimination process. If we have 90 percent Europe, this is too much, so you have to refine, like triangulation, we are trying to find out from an absolute perspective what we like the most, what are the best in the index and from the process of construction what's optimal from a risk/reward perspective. One, it has a lot of absolute driven performance and absolute driven bias. Two, it has taken into account some of our sector and geographical biases and, three, relative to the benchmark, we feel that we are taking a lot of bet but not irrational bets. After two, three, four iterations we come up with something that’s fulfilling all these objectives. First, look from an absolute return perspective, which sectors or companies provide the absolute return. You look on a relative basis whether there are geographical or sector biases against the benchmark, whether we have high confidence that these sectors or regions are better than the rest and try to be biased towards those even more and then have a high level of diversification. These three things will ultimately give us a portfolio that is basically optimal for managing other people's money. Our goal is to have an alpha from 5 to 10 percent in a good year. When you shoot for 28-30 percent alpha, we think it’s irrational and it’s too aggressive. Consistency is key, and to have consistent alpha you need to have a reasonable deviation, a reasonable bet and you have to take the pain, because our personal pain could be different than the pain of the institutional investor who’s giving you his money. Our benchmark for the fund is the MSCI All Country World Index Ex-USA Index.

Q: How many holdings do you generally have and what is allocation for individual holding?

We are aiming at 100, plus or minus 20. If we have a blue-chip name that we like, then we’re going to have two to three percent position. If a mid-to small-company that we like, it will be something like one percent. If we are in a universe of blue-chips, the large companies where we see the most value and the most excitement, then we’re going to be much lower, close to 80 names and then if we are in an environment where a lot of the opportunities are not in the blue-chip names, but more in lesser-known names, mid-cap or maybe middle countries maybe we’ll go up to 120. So the range we are aiming for is between 80 and 120 depending on the opportunities.

Q: What goes into your sell discipline, when do you decide to sell?

In theory, you sell for two reasons. Either it is a winning stock that you feel has topped out, the multiples are too high or the sector is overcrowded, or you made a lot of money and it’s time to leave. You get out of something that you feel there is no more value to, or you sell if something is going down because you feel like you were wrong. Now the problem will be is when you are selling and you don't know if it's wrong. So the biggest challenge as portfolio manager is to be able to detect as early as possible when something is not working, because the earlier you can detect that something is not working, the easier it is to make the decision. The longer you wait the more difficult it is to make the decision. Also, you need to understand the story of why something is not working. If I can know early on why something is not doing well, the decision to sell can be easy. But many times we run into a situation where something is going down but we don't know why. Finally we realize the company is looking to buy a certain company and for a rights issue, and stock keeps going down because some insider information leaked into the stock. The stock keeps weakening and you keep asking and looking and you don't get the answer and then when the thing happens you realize. For me if something is going down and I understand why, I am more inclined to sell. The most painful decisions for us are when something is going down and we could not understand why and nobody can tell us why and then usually it’s really bad news. For me the most dangerous and the most difficult is when something is weak and you don't have the explanation. Only after the fact do you realize that somebody had material information, because that information would never have been guessed by the market before that day. Our role is, one, to monitor all the names we have and, second, if a stock we own is doing well, to ask ourselves do we have the right weighting, what we call the right W. Another big issue is that people underestimate. People don't reduce names easily when they’re not working and also people sometimes are lazy and certain names are working and they could go up ten times. For us the weighting in the portfolio is never optimal, if a stock is doing well our job is to decide is the weighting high enough or has it gotten too high, are we sticking on the wheel, should we be one percent, should we be two percent, and likewise if a stock is not working, should we cut it in half, should we sell it?

Q: What is your definition of risk and how do you manage it?

There are eight key risks in the portfolios: Geographical risk, sector risk, foreign exchange risk, value versus growth risk, cyclical versus defensive risk, market cap risk – large versus small, liquidity risk, and momentum risk. These are all the kinds of risks you have to look at in the portfolio and you have to measure them and then you can see sometimes where the pain is coming from. When you have a very conservative portfolio or a lot of tiny-, small- and medium-cap names, but if you are highly diversified, usually large cap, good franchises and well-diversified assets, stock selection is not your main risk. It is more like the others, you have a high sector risk, high geographical risk, or sometimes you don’t have such a geographical risk but you have something hidden, like you have high debt in all the sectors, you have high momentum and big winners in all of the sectors you own or you have a high bias towards small cap names in an environment going back to large cap names. These eight risks are the key risks to monitor and they will tell you if you are doing well, and which kind of risk you are taking that’s affecting alpha negatively. You monitor it and if things change, you have to know why they’re changing and then decide what to do about it. Usually diversification is free risk, it’s free insurance. There’s nothing free in the market except diversification. Fundamentally that has been proven over time. Diversification if it’s done intelligently increases return and reduces risk. People want a very narrow portfolio because they want to have a higher alpha and increase their risk to get a higher return but it is not an optimum thing. You can never beat me with only one name. The more you are confident in the process you have, the more you want to be like a marathon runner and be patient and consistent, so having a diversified portfolio is good.