Q: What is the investment philosophy of the fund? A: Our mission is to deliver above-average returns with below-average risk and volatility over a complete market cycle. We are traditional value investors looking for companies that are out of favor and offering appreciation potential. We focus on dividend-paying stocks because we have found that they offer benefits that aren't offered by other securities. Q: Why are the benefits of dividends? A: Market history going back to 1926 shows that stocks with dividends have been less volatile than non-dividend paying stocks. During a market correction dividends continue to contribute positively to total return, offsetting price depreciation. The presence of a dividend also can provide an indication of a potential floor price during a decline. So in that regard, focusing on dividends is a defensive way to invest. Furthermore, we have found that companies with consistent dividend records are generally more cautious, and their stocks tend to be less volatile. For us, dividends are a way to manage portfolio risk. Companies paying dividends have the financial discipline to manage the company and its cash flow for the benefit of shareholders. Management is under intense scrutiny these days to deliver better return to shareholders. When they declare a dividend they cannot restate it. What we like about companies paying dividends is that they have strong cash flow generation, are in the mature stages of the business cycle, and do a good job of managing both risk and return. The presence of a dividend essentially forces management to have financial discipline to manage the cash flow for the benefit of the company and shareholders. Q: What are your screening methods? A: We begin with a market cap of more than $2 billion and a dividend yield of 2% or better. In addition we also look for adequate liquidity and good credit quality. Looking at dividend yield, when we find rates higher than the market rate, it could indicate that a company is out of favor and not fully valued by the market for one reason or another. Once we apply the market capitalization screens and other metrics such as our dividend yield bogey, our investment universe is narrowed to less than 300 names. On average we hold 50 stocks in the portfolio. We are looking for companies that have good balance sheets, free cash flow, low debt to capital, solid return of capital, and commitment to the dividend. We are also looking for a catalyst for appreciation, anything that will make the company grow. This could be the result of a possible merger, new management, strategic industry position, or high barriers to entry. Q: When does a stock become a buy? A: We have a strict buy discipline. When a stock meets our market cap, dividend bogey, and valuation and profitability criteria, we will add it to our buy list. The stock is added to the portfolio if we can determine a catalyst that could drive the earnings growth. Sometimes companies are hit by an earnings shortfall and the stock gets hammered. At that time we apply our analytical skills to understand the nature of the shortfall. If we determine that this impact is temporary, we will consider the stock for closer evaluation. We strive to keep our portfolio turnover to 30 - 35 percent. Q: When do you reduce or sell your holdings? A: We have strict sell disciplines. We sell a stock if the dividend yield declines to 1% or below. When the stock appreciates and the dividend yield declines, we take the opportunity to sell some of our holdings. We would rather have a diverse portfolio than chase a stock that is running up. We also sell when the stock declines by more than 30% from the average purchase price. We will sell if we believe that a company's fundamentals have changed or if the reasons for our purchase no longer exist. Lastly, we will sell if we have identified a better candidate. Q: What are the core elements of your research process? A: Our research process combines fundamental and technical research. We research one company at a time. We actually have seven portfolio managers on our team who act as analysts as well. All of the portfolio managers cover several sectors. We consider ourselves generalists and share research responsibilities. We are a bottom up manager and are cognizant of our benchmarks. We begin with stock screens. Stocks come into our universe either by an increase in the dividend or by a decline in price. Qualitative analysis of the 300 names in our universe narrows the list of portfolio candidates down to 50 - 60 names. We start with valuation ratios and profitability analysis and we look at the stock value relative to the profitability. We have two ends of the valuation and profitability spectrum. For example, Avon and Proctor & Gamble are both very profitable but they are fairly valued in our opinion. On the other end of the spectrum, J.C. Penny, Royal Caribbean, and Motorola are not that profitable but are attractively valued relative to their cost of the capital. Once we have identified portfolio candidates, we look for the catalysts for appreciation. J.C. Penney is a good example of our research process in action. Eckerd Drug stores is a division of J.C. Penney, and to us, represented an undervalued asset. We thought that the company would benefit from spinning off Eckerd. In our balance sheet analysis, we thought that the company would still have the high profitability but would be left with less capital and debt. We thought that the stock would appreciate in the event of a spin off and, fortunately, that is what happened. Q: Can you please share other examples of your stock picks? A: Northrop Gruman is an example of how we are constantly reviewing the portfolio. We bought in around $80 and sold a portion of it in the $120's, to lower the allocation. We closed out of the position at $105. We had the rare opportunity to trade during several cycles, and we were able to generate significantly higher return in the portfolio through this stock. Motorola is a case of a stock moving in and out of our universe relatively quickly. During the last year, growth managers were continually selling the stock. As the price fell, the dividend yield rose. Finally it crossed our 2% yield threshold. We believed the stock was oversold and bought it while we had the window of opportunity. As we had hoped, the price ran up and given the inverse price/yield relationship the yield fell to 1%. Following our discipline we sold out at double our purchase price. Another example is Royal Caribbean. The company was suffering from the aftermath of the 9/11 attacks when nobody wanted to get on a ship. Prior to the attacks, the company was investing heavily in new ships, and capital expenditure was very high for several years. We researched the stock and saw that once these expenses were carried out, the company had no significant expenditure ahead of it. So we decided to invest in the stock when it was out of favor. People are cruising again and this stock has worked well for us. We found other opportunities after 9/11 as companies that have fallen out of favor with growth managers came to our universe. For example, Coca Cola, is now in our universe and has increased the dividend. We added it to the portfolio around $36-$38 per share. The stock has a 2% dividend. Q: Can you share with us few stock picks that have not worked out for you? A: We are value managers, so we may be early in the investment cycle. When we are looking to invest in companies, sometimes all the bad news may be out and sometimes it may not be. Nokia is an example. The stock had been trending downward since March and its dividend yield rose above our 2% hurdle. We did our research and felt comfortable with the valuation and profitability forecasts and bought the stock around $14. In mid-July the company announced lower sales and reduced estimates. The stock subsequently dropped to the $11 range. We re-ran our research and continue to believe that as the world's largest handset maker, Nokia still has the catalyst for appreciation we initially identified. However, if more bad news surfaces our sell discipline will force us to get out of the position. Keep in mind that as value investors, we often are buying stocks when conditions appear to be rather bleak. A case in point is large pharmaceutical companies. Currently, we own a number of these stocks and they have not been beneficial to the portfolio. While they are trading on an inexpensive valuation basis, and these companies should benefit from the demographics of an aging population, there is lot of political noise because of the election cycle. These companies are generating a lot of cash and are paying strong dividends. The stocks have not performed to our expectations, but patience is something you learn as a value investor. Q: What sectors generally fall in your universe? A: We look at the companies first, and sector weighting generally come as result of where we find good companies offering attractive values. In general, companies in the technology and biotech sectors do not pay dividends, so we rarely invest in them. Restaurants are a similar case. Industrials, cyclical and financials are generally where we find the investment opportunities. Q: How do you measure and control investment risk? Do you benchmark your fund to an index? A: The BARRA Large Cap Value Index is the fund's benchmark. We are benchmark aware, but we are stock pickers. We find the names and then decide the allocation based on our views of the market and the stocks. We look at total active risk of our portfolio relative to the benchmark - sector weighting is one component to that. Too high active risk, you look like you are not style pure and too low active risk makes you look like you are closet indexer. So we monitor our total active risk and make sure that it is in line with our expectation. The nature of our stock screening keeps us at a very style pure level. One of the reasons investors are attracted to us is because we stay style pure in our investment discipline. They understand that in a typical market we will do what we tell them we plan to do.