Q:  What is the history of the William Blair Global Small Cap Growth Fund? A : The focus of William Blair & Company, since inception in 1935, has been to look for quality growth companies. The William Blair Global Small Cap Growth Fund was started in April 10, 2013, following the launch of the Global Leaders Fund in October 2007. We co-manage the global small cap growth strategy with a team-oriented approach. Q:  How is your fund different from its peers? A : The portfolio meets the quality parameters of a U.S. portfolio but on average is somewhat less expensive in terms of valuation. With a much larger opportunity set, our strategy is formed with a broad footprint whereby we can build a portfolio in terms of industry and region where we see the greatest opportunity. We are seeking to generate market beating returns in the best way possible across different regions and sectors and are not limited by exposure to any one region, country or sector. Our goal is to get that global diversification and find the companies with the best growth prospects and returns on capital for the lowest price but with a time-tested fundamental growth investing approach. However, one of the risks of assembling a global portfolio based on a combination of different regional portfolios is we can end up with unexpected regional or sector imbalances based on the structure of the portfolio itself. Q:  What does your global footprint cover? A : Our benchmark is the MSCI All Country World ex-US Small Cap Index which basically excludes frontier markets but includes many of the emerging and developed markets. Q:  What core principles guide your investment philosophy? A : The essence of our philosophy is in quality growth and durable business franchises. We seek growing companies, but that is not enough. Quality of growth and durability of the business franchise is equally important to us and we believe that strong corporate performance is the foundation of long-term returns. Moreover, we believe the market is inefficient in distinguishing between an average growth company and a quality growth company so what we are looking for is earnings growth that will be faster than or more durable than the market expectations. In both cases, we expect the future to be better than what is currently embedded in terms of valuation. We focus on companies with very strong management that maintain the right incentives, vision, and experience. We look for companies with competitive advantage and sometimes this advantage can prolong the duration and size of the earnings growth. In addition, we are looking for well financed companies with conservative balance sheets that can weather various economic scenarios over time. Q:  What is your investment strategy? A : We look for small cap companies with meaningful competitive advantage that are enjoying, in our estimate, sustainable growth. We take a broad view of the world and our proprietary database collects and organizes fundamental and systematic information on 14,000 companies across all market caps. This detailed database of information not only captures publicly available information but also includes analyst notes and views. Our system categorizes these companies based on quality, operating margins, and valuation. The list of stocks that we follow is a small subset of the universe of listed stocks. Of 5,000 listed small cap companies, there are roughly 2,200 or so that we define as “quality growth stocks” that comprise our eligibility list. We then divide that eligibility list, and task our 24 analysts to each follow approximately 100 companies. Next, we ask them to recommend between two and four dozen stocks from that coverage list, and also ask that they recommend one dozen new ideas annually. Adding all those numbers up there are about 500 small cap stocks recommended for purchase by our small cap analysts. Of 500 recommendations, we pick the 120 companies that we have the highest conviction in for inclusion in the William Blair Global Small Cap Growth Fund. Typically the analyst will place that stock on the research agenda, which is a live document our team watches over time. Every time a research analyst puts a stock on the research agenda one of the portfolio managers will endorse or approve that idea. The process is iterative and interactive and involves continuous communication between fund managers and analyst, which eventually leads to a presentation by the analyst to the portfolio managers highlighting the investment attributes of the idea. Q:  What is your research process? How does an idea make its way into the portfolio? A : At William Blair we have been investing internationally for over fifteen years and we have developed a number of processes and quantitative resources, as well as developed a strong research team. Our decision making process is in line with our culture. We are consensus building, so our analysts make recommendations, and we then decide what to own, and how much. Q:  How is your investment team organized? A : Our global research is centralized in Chicago and we have 24 dedicated sector analysts. We have small, and mid-to-large cap analysts in six sectors – consumer, financials, healthcare, industrials, information technology and materials. We have career analysts and their compensation structure is aligned with the long term performance and success of the investment strategy and the ideas they recommend. At William Blair we strongly believe in a concentrated research process that allows us to compare and contrast each security’s risk and reward on a global basis. Our analysts and over a dozen portfolio managers in the global research and portfolio management teams travel extensively. We are often meeting companies and we have a 24-hour trading capability that covers global markets. We have a team of traders based in Chicago and London that provide 24-hour trading capability. Q:  Could you illustrate your research process with some examples? A : AMN Healthcare Services, Inc (NYSE: AHS), a staffing company in the U.S., is one example. Its specialty is nurse staffing; hospitals are increasingly reaching out to companies like AMN to augment their workforces, depending on patient volume. Hospitals have a base level of full-time staff and then at the peak times they often augment their staff further with AMN personnel. These temporary healthcare staff are able to perform services for multiple providers, so they are typically a more efficient way of managing a workforce, and the arrangement fits the needs and desires of many workers today. Our small cap U.S. healthcare analyst has known and followed the company for some time, and through our proprietary financial analysis was able to identify that the stock was attractive, based on the potential outlook for more earnings growth than the market expected, as well as a valuation that did not yet reflect that. Some historical perspective helps explain this investment. AMN Healthcare is the largest company in the fastest growing niche of temporary staffing. The temporary staffing industry was formed in the 1960s in the clerical and light industrial segments, and the penetration of temps into corporate America is now about 2% of all workers. In the more nascent healthcare segment it is approximately half that level, so we think that niche can grow nicely. AMN Healthcare has the early lead as the industry leader in that fast growing niche. What makes AMN even more attractive is that management is strategic and forward looking, in our view. They have created an offering for hospital customers to be the outsourced “managed service provider” to fully manage its temporary labor. This type of arrangement is quite common in large corporations in the U.S., but it’s brand new to hospitals and AMN Healthcare is leading this growth and, in our opinion, is the most forward thinking company driving that trend. The stock has done quite well and is now trading at 20 times the Wall Street consensus forward earnings expectations. When we compare the opportunity set in terms of earnings growth, and when we take into consideration where we think earnings growth likely will be, and then we compare that to the embedded expectations in the stock, we find it attractive. We believe that growth will be more durable than the market expects because of the industry trend in place, in addition to the management capabilities. So that is one of our more interesting investments right now. Another name we own is Ted Baker plc (LON: TED), the British high end apparel retailer. It has an attractive footprint across the U.K. and Europe, with 80% of the sales in these two markets, but they also have a growing footprint in North America, and the rest of the world. The company has a fun culture and each of its stores is unique. Earnings have grown at a compounded rate of 14% since the stock was listed. The stock is up 13 times since market listing in 1997. Our small cap international consumer analyst met with the CFO of Ted Baker in early 2013 and the stock was then placed on our research agenda. In mid-2013, the stock was recommended and we purchased it in the portfolio and it has been one of our stronger performers. The stock also trades at 20 times forward earnings, in-line with its average multiple over the past three years, which is becoming rare in a global market that has been strong. The reason we think Ted Baker is an attractive offering is it has had great success in every market it is involved with. It is remarkable for a small cap company to grow earnings at 14% a year for almost 20 years. It started off with one store in London and it now has more than 360 locations. The company uses a mix of directly operated stores, concessions in department stores, and wholesale sales to maximize its reach with lower capital investment. The margins the company is able to generate are quite substantial. The higher-income global consumer is still spending robustly and doing well. High productivity, strong margins, and sound capital discipline relative to peers, results in strong return on invested capital. What we believe is those same aspects that cause some consumers to desire Ted Baker fashion will be translated to a growing network of worldwide stores. To sum it up, Ted Baker is a fun brand with a growing worldwide franchise, and it represents an interesting and growth-oriented offering compared to more traditional apparel retailers. Q:  How do you construct your portfolio? A : The portfolio consists of approximately 120 different stocks representing our highest conviction names. Our strategy is basically a fundamentally driven, bottom-up portfolio construction process, currently with just under half of the portfolio invested in the United States, which is the largest region in our global small cap benchmark by market capitalization. We construct the portfolio where we see the greatest opportunity. Right now we are seeing fewer opportunities in Continental Europe and the United Kingdom, and we see more strong investment opportunities in Japan. The portfolio construction process is a combination of inputs from our macroeconomic team as well as our fundamental conviction about the risk/reward equation of each individual stock, with a final overlay of risk management to ensure the risks we are taking are the ones we intend to take. Q:  What is your buy-and-sell discipline? A : Typically, when we first buy a stock, we buy an average size position. This is after doing a significant amount of research work. As we get to know the company over time and as the company performs (and assuming the valuation remains attractive), we are prepared to increase allocation. Similarly, when we sell a stock, it is typically for a fundamental reason (a change in our upfront investment thesis). For example, if the investment thesis revolves around the quality of the current CEO, and the CEO is now departing, we likely would sell. Perhaps our upfront investment thesis revolved around a strong and durable competitive position, and yet now a new entrant has emerged; we would likely sell in this case too. At times valuation alone will be a reason to sell, because market price moves beyond our target valuation. But typically we sell for a change in underlying fundamentals. Q:  Do you set a target price when you purchase a stock? A : We are not strict on target prices because as market levels fluctuate, and as different countries’ relative valuations move, a strict absolute target price becomes less useful. We have quantitative tools that basically reshuffle every equity security in the world every day, re-ranking them according to the parameters and the factors that we have set upfront to detect what is attractive. So as things change over time, different stocks become more or less attractive but we really want to own stocks with significant upside and limited downside. Q:  How do you define and manage risk? A : Making an unintended bet is how we define risk. We want to make sure the risks we are taking on are the ones we intend to make. In our view, the best risk management starts with knowing your companies forward and backwards while understanding the companies’ strategies. We then layer on third party risk analysis tools, and we “slice and dice” the portfolio using our quantitative tools that monitor changes. Risk management to us is about making sure that that we are only making intended bets. We are more focused on tracking error. William Blair Global Small Cap Growth is a strategy that typically runs in the 3% to 5% tracking error and what we are trying to do is create a lot of alpha. By buying quality growth companies we mitigate that tail risk to the downside substantially. Our companies typically have strong balance sheets, solid margins of profitability, and some of the best management teams, so in a downturn these companies often outperform as a result of the quality of the company and the persistence over time. We manage our position sizes while monitoring tracking error, although we don’t have a specific target for that metric Our Active Share index is typically over 95%, so we are definitely not “hugging the benchmark,” but instead are attempting to own the best possible growth companies in the world, at reasonable valuations.