Q:  What is the investment philosophy behind your fund? A : First of all, we are looking to invest in companies that have the ability and the willingness to return capital to shareholders. As part of this objective, we manage a portfolio that seeks to generate additional return to the general market without taking additional risks. As we invest in large cap companies, we are also mindful of the dividend yield of each stock. We prefer to construct a portfolio that consistently generates better dividend yield than the market, because we believe that dividends are significant contributors to long-term gains. We look for long-term winners that sometimes the market takes a little longer to understand; most typically those that will also be high dividend payers. Such companies have not only grown dividends and generated a lot of cash flow, but they also have some change in strategy or a catalyst built into them that we think the market has yet to recognize. Q:  How do you transform this philosophy into an investment process? A : We focus on companies that have the ability to sustain and grow the dividend, which is an indicator of strong cash flow as well as a disciplined management team that takes care of investors. Our investment process takes into consideration three stages of the investment cycle. The first stage begins when the economy is rebounding from a recession and we pay more attention to businesses likely to benefit from new spending in industries such as media, broadcasting and home building. The second stage, which is more difficult to define, involves the period when economic growth appears to mature and the market goes into a rotation into more defensive names, although industrial companies are still generally preferred. In the final stage of the cycle, the market generally rotates into more defensive sectors like healthcare, utilities and food processing. We own a diversified basket of securities that have exposure to each part of the cycle, and in some cases that might be a single security, while in other cases it could involve entire sectors. However, from an overall risk control perspective, we would not take any sector bets. What we seek to do instead is look for a broadly diversified portfolio of holdings that can win regardless of the cycle. Q:  What are the steps involved in your research process? A : We start out with the universe of securities included in the Russell 1000 Value Index, which we use for benchmarking purposes, before we continue to screen further based on market cap and trading liquidity. Since we are primarily focused on the fundamentals of a business, our research process is driven by a diligent review of one company at a time. In addition, our analysts identify out-of-benchmark ideas in their respective sectors and we add those to the universe for research. There is also a quantitative model that we use in order to take the top 20% of the names on a daily basis for further examination. As part of our regular meetings with each of the sector analysts covering both domestic and global companies, we go through their findings to understand where their thinking converges or diverges and what their best ideas are. For us, it is extremely important to understand where they see some of the best opportunities within different sectors. This approach resonates quite well with our corporate philosophy, because the way we drive fundamental research at Putnam is by encouraging differentiated views. If we all came around to consensus views on a stock, I do not think we could outperform. In addition, we apply group stock selection whereby analysts with exciting new ideas will pitch stocks to small groups of portfolio managers, sometimes just individually given the appropriateness of the stock. Then, we generally follow up with the company’s management to gain more insights in a timely manner. Before we decide to add a name to the portfolio, we use our what-if system to understand how this course of action will impact our risk profile, the weights for sectors and regions, or the dividend yield. Also, I monitor daily optimization reports on a regular basis to find ways of minimizing risks and maximizing returns. Q:  Would you elaborate on your research process with some examples? A : Comcast Corporation, the cable network operator provider, is a great example of what we tend to seek in our investment process. Here is a stock with double-digit earnings growth, free cash flow yield over the next two years and a durable sector advantage, in broadband Internet in particular. The reason this stock is in our portfolio is because, fundamentally, we can see massive improvement in the business that has a favorable effect on the company’s free cash flow growth. Moreover, Comcast has peaked in capital spending and we see a lot of visibility in free cash flow generation over the next two years. In fact, they have generated $9 billion in free cash flow in the last two years. In our view Comcast is well positioned to take advantage of the recovery in the housing market and the company also has low exposure to Europe. Furthermore, their recent acquisition of NBCUniversal could potentially serve as a turnaround catalyst. There are a number of catalysts for re-rating of the company’s debt too, and in my view that excess cash begins to be returned to shareholders, both in terms of dividend as well as buyback. Another name would be in the healthcare sector, where we have invested in Eli Lilly & Co., the pharmaceutical company. What makes Lilly a great example of our investment process is the fact that it has both valuations and a number of catalysts going forward, particularly as it relates to their pipeline of new drugs. We think Lilly is underappreciated by Wall Street given that the company has a strong phase III pipeline and a recent announcement on the Alzheimer’s front was accepted as positive news a few months ago. In the coming months, we will continue to follow information on drugs coming out of their pipeline from an oncology perspective, which could significantly surpass Wall Street estimates. As the company wins the regulatory approvals for new drugs and starts gaining investor attention coupled with the cost cutting in place, we will see that positive momentum reflected in the stock price. All in all, Lilly is a great example of a company that has a number of catalysts placed in different areas. Q:  How do you build your portfolio? A : We typically hold anywhere from 80 to 110 names in the portfolio. For diversification purposes, we use internal risk models as well third party risk analysis models. However, on a sector basis we generally stay within a range of plus or minus 5% established in the index. Depending on liquidity, we can be slow in building up positions. We will normally buy 50, 75, 100 basis points initially before building these positions up over time. From a position size perspective, we never want much risk from any single position in the portfolio. As a result, any larger positions will be 250 to 350 basis points in active space and they will not get much larger than that. The top ten holdings in the portfolio typically range between 20% and 30% of assets in the fund. Our portfolio turnover typically averages about 50% a year, and that is explicitly a two-year holding period. From my perspective, there is never a rush in or out of a stock unless there is a special circumstance. Q:  What is your sell discipline? A : We have explicit target prices set by each analyst and we keep monitoring them on a daily basis. That said, I believe achieving or approaching the target price is the first line of defense in our sell discipline. The second step in our sell discipline process will often come from discussions with analysts. When a stock is re-rated and approaches the target price, I inform the respective analyst that we may be preparing to trim the stock. In addition, we use the quantitative model to identify stocks and look at changes in quantitative scores. Once a week we review all our portfolio holdings, looking for changes that may affect a company or its stock such as earnings revisions, cash flow estimates, changes to the business model or a new development in the competitive situation. From a valuation perspective, if a stock is no longer cheap relative to its peers and sector, it generally ends up on our sell list. As far as internal recommendations at the firm are concerned, if an analyst’s thesis proves wrong, we sell a position too. Q:  What risks do you focus on and how do you mitigate them? A : We closely watch portfolio risk as we construct the portfolio in such a way that we can have volatility neutral to the market in order to avoid any significant swings. It is not that we do not contemplate the economic risks, but from the perspective of day-to-day monitoring and portfolio construction, I am mostly concerned with the risks that come from the security holdings. Thus, we try to maximize the additional return that we can generate from the market without taking additional risks. Personally, one of the risks that I am most afraid of is the one that I do not understand. For instance, I am worried about correlated bets in the portfolio which will often come about from a singular view from the analyst, perhaps due to their bias towards a certain type of stock. Our risk models are helpful in identifying such correlations. We have a dedicated risk team and an intranet site where I can go and look at the risk characteristics in my portfolio, which allows me to conduct different scenarios of risk analysis based on different stock and allocation weight selections.