Q:  What is the historical background of the GE Premier Growth Equity Fund? A : GE Asset Management is a global investment management firm wholly owned by General Electric Company. At the end of 2009, our firm has $118 billion in assets under management and provides management for institutional and individual investors. The GE Premier Growth Equity Fund was started in 1997, and I have managed the fund since its inception. The investment objective of the fund is to seek long-term growth of capital and future income rather than current income. Q:  What core beliefs guide your investment philosophy? A : Our philosophy is based on Growth At a Reasonable Price, which means that we are investment oriented rather than trading oriented. We look for high-quality companies that we believe can grow earnings at a double-digit rate for the foreseeable future - a rate of earnings growth that is 50% to 100% greater than the overall market growth rate. We are always mindful that when we buy shares we are buying ownership in the business. Q:  What are the underpinnings of your investment strategy? A : We invest primarily in a limited number of large- and medium-sized companies that have above-average earnings growth histories and/or we think have future growth potential. We seek to identify securities of companies with characteristics such as leadership in their respective industries, financial strength, high quality management focused on generating shareholder value and above-average annual growth rates. To us, the most important measure of investment performance has been growth in the intrinsic value per share over the long term, but earnings are generally a good proxy for that growth rate. It is our belief that there is much greater volatility around prices than business value, so we try to identify what the growth in the underlying business value is and also, whether the price today provides an opportunity for us to purchase that growing value at a discount. Q:  Why do you believe that industry leaders drive industry growth? A : Generally, we look for companies whose growth has been driven by the market share leader. A classic example of a market share leader would be Intel Corporation, in the microprocessor industry. Intel has had the dominant market share for the last twenty years with the principal innovation in the industry driven in large part from the company’s research and development. Thus, the challenge we see for investors is to recognize the evolution of industries and the players in the industry and be able to capitalize on that. Q:  What are the analytical steps in your research process? A : Our research team consists of fourteen analysts organized along industry or sector lines who are also groomed to be industry experts. The team employs a fundamental, bottom-up, research approach, resulting in a process that is both disciplined and repeatable. Starting with a universe of approximately 400 names, the team monitors and researches each company on a regular basis, assessing several earnings and valuation metrics with the objective to identify those with the highest quality and potential for growth at a reasonable price. We have a long-term investment horizon and we tend to hold a stock until either its growth prospects diminish or it has become overvalued. The final 30 to 40 names typically held in the strategy are those that represent our greatest expectations for growth at a reasonable price. Q:  What are the time periods and modeling techniques your analysts employ in constructing their forecasts? A : Our analysts typically build models with detailed financial statements, including income statement, balance sheet and cash flow statement. The models tend to be detailed for a period of two to three years and then become more of an extrapolation of growth rates. In our opinion, the precision is less relevant beyond a couple of years. We can usually come to a conclusion around the attractiveness of valuation by modeling out two to three years. Q:  How do your analysts modify and improve your forecast models over time? A : We modify our models in real time around the most recent data points such as quarterly earnings, industry data, or meetings with management. Certainly, we are aware where we have met our forecasts and where we have missed, and it is usually easier to forecast earnings for a food company than it is for a tech company. We also discuss ranges around a base case, and some industries have a wider range of outcomes. For example, our forecast of an energy company starts with an estimate of energy price assumptions. We also have discussions around lessons learned over time. Q:  Do you change your perception of industries over time? A : We do have discussions around the relative attractiveness of an industry over time. But the changes in our view are gradual. For instance, the personal computer industry grew rapidly in the 1990s, but the industry is now viewed as mature with a slower normalized growth rate. The same would be true with wireless handsets. We have longstanding views of what makes an industry attractive or unattractive in terms of investment opportunity. For example, we have long viewed the microprocessor industry as attractive and the memory industry as unattractive – that hasn’t changed for years. And our ownership of stocks is concentrated in those industries that we feel have the best long-term prospects. The challenge for money managers is recognizing change over time. Take the pharmaceutical industry. This was a great growth industry in the 1980s and 90s, but growth has slowed significantly. We have had many discussions on why that occurred and why R&D productivity is worse now than it used to be. Q:  What sectors do you find attractive at this point in time? A : As of the end of 2009, the largest weighting in our portfolio was the technology sector. We think there are short and long-term reasons to like the tech sector. Short term, business is improving with the improving economy. Longer term, we see the confluence of a few product cycles. Coming out of the recession, we see an upgrade cycle in personal computers. We also see good growth for the next several years in smartphones, and there are a number of ways to play that trend – handset companies, wireless chip companies, and tower companies to name a few. In fact, the strong demand in wireless data is also driving demand for basic network architecture such as switches and routers. A couple other favorable attributes of the tech sector are global reach – many of these companies generate over half their business outside the U.S., and financial strength – many of the large tech bellwethers have huge cash balances. Another sector of interest for us is the financial sector, where again, coming out of the recession we see opportunities. Here we are more interested in niche financial companies rather than the big banks. For example, we think the exchange companies and the trust/custody banks look interesting at this time, based on the normalization of the economy and the financial markets. Q:  How do you construct your portfolio? A : The fund is a concentrated portfolio that as of December 31, 2009 was invested in 36 large-cap names, each with an average position size of about 3% of assets. At that time, the largest holding in the portfolio was over 4%. Occasionally, a holding may drift over 5% on market appreciation but, again, we tend to sell into that so that we do not allow one individual name to be outsized in the portfolio. Our portfolio turnover has averaged about 25% a year since inception. We have maintained a multi-year time horizon on average, and we target each new position in the portfolio with a timeframe of three-years or beyond. The two benchmarks that we use are the S&P 500 Index and the Russell 1000 Growth Index as a proxy for large cap growth portfolios. In terms of stock selection, we add equity securities from a number of industries based on the merits of individual companies. Since the portfolio construction is driven by a bottom-up process, our sector allocation is a result of the stock selection process but it is monitored as part of the portfolio risk control process. We employ a disciplined valuation approach with relative price-to-earnings targets and scale buy and sell. In short, we buy stocks of companies that have favorable fundamentals and attractive relative valuations. Q:  What risks do you focus on and how do you mitigate them? A : We do not attempt to time the market with a cash position in the portfolio. The risk measure that we are most concerned about is the risk of a substantial loss in an individual security. We try to avoid having an equity position go down substantially in value in a short period of time. We believe the GARP philosophy of growth at a reasonable price is one way to mitigate that risk. The principal tools that we use to control risk are maintaining the valuation discipline and re-adjusting weights in individual names to where we feel the most attractively valued stocks have the greater weights in the portfolio. We also monitor all the traditional measures, including sector weightings, standard deviation, tracking error, and beta as part of our overall risk management process. Q:  Large cap investing does not go without its share of fraud and unforeseen events. How do you prepare to deal with these events? A : We look for red flags or warning signs but, needless to say, fraud, by definition, is difficult to spot in advance. Detailed financial modeling helps in the process of detecting red flags. Also, by having an ongoing dialog with company management we aim to pick up signs of where changes might be occurring at the margin. Finally, we tend to stick with companies where we feel we understand the products and services. We want to understand the business and feel confident that we have an ability to forecast the growth of the business. As far as unforeseen events go, I think we did well in navigating the turmoil in the financial sector in 2007 and 2008. While I won’t claim we saw the coming collapse, our research team did see the lax underwriting standards in the banking industry and recommended an underweighted position in the financial sector. Our underweighting and preference for quality served us well in the downturn. Similarly, our research team did well during the lead up to the tech bubble in 2000, highlighting the valuation risks. We are strong believers in doing original research in the management of equity investing. “Our philosophy is based on ‘Growth At a Reasonable Price,’ which means that we are investment oriented rather than trading oriented. We look for high-quality companies that we believe can grow earnings at a double-digit rate for the foreseeable future.”