Q: How did you come up with the idea of this fund? A: Initially, we started off as multicap, value and growth fund and after a year into that process we decided to define ourselves as small cap value because we had institutional business the required a style box. For a while we couldn’t buy companies that had market caps greater than $2 billion and we couldn’t buy growth stocks either. Everything worked fine until the tech bubble in the late 1999 and 2000. The bubble sucked the oxygen out of small cap value because what worked in the bubble was large growth, or the opposite of our style box requirement. As a result, our institutional clients subsequently left us because instead of wanting managers to stick to their strategies they decided they wanted managers that were more flexible. For the last seven years we have remained multi-cap multi-strategy fund. Q: What is the investment philosophy of the fund? A: I believe that you can’t have just one strategy but you need to have multiple structured strategies to provide consistent performance. Investment psychology changes and markets reward different investment styles at different stages. We have multiple quantitative models that I have built up over the years. Sometimes you seek value and sometimes you want to be aggressive growth and it changes along with the market. That is why a single strategy is not always going to produce good results. The key is staying in synch with the current style of the market. Our whole money management focus is trying to find the sweet spot of the market – and it doesn’t matter whether it will be in growth, value, large cap, small cap, international or domestic stocks. Now we define ourselves as a globally diversified core equity fund that invests in companies of all sizes and market segments. Q: How does this philosophy translate into an investment strategy? A: Today, when information comes from numerous sources, we are trying to filter out the useful information on which we need to base good decisions and then translate data into actionable information. Our second key principle is to embrace appropriate levels of market risk. And the third principle is to use a continuous, disciplined, repeatable process. To put that into practice, first we break the current market down into segments. The first thing we look at is whether the company is value, growth or blend and then we look at whether it is small, medium or large cap. Right now, probably the sweet spot in the market is mid and large cap growth so that would indicate the types of stocks that we are likely to favor. Secondly, we take a hard look at the industries in the market and try to identify the industries which are producing the best results, the ones that are producing the highest earnings revisions and the ones selling at the lowest valuation ratios. For example, today we wouldn’t want to be in home builders and all the businesses that service the home building market. Knowing that the Fed is trying to slow the economy would also indicate that the consumer discretionary sector is not an area that you want to emphasize either because the consumers will have to save more. So we try to put all that information together along with a diverse set of models that we run on a daily basis. Some of them are growth models so they are looking at revisions in earnings, price momentum and earnings momentum and some of them are valuation models and they are looking at dividend, price to cash flow and other measures of value. Q: How do you go about stock picking? A: Essentially, we are doing a cluster analysis with the idea that stocks that have similar characteristics will produce similar results. Every day I rank all the stocks in terms of the expected return and their potential contribution to the portfolio. If we have high exposure to energy and we come up with another energy stock that has a high return, the model would probably not give that energy stock a high rating simply because it would add to the overall volatility of the portfolio. Q: What kind of companies are you looking for? A: It depends. A year ago we were much more focused on what I would call the dividend growers. Today we are more focused on what I’d call GARP (growth at reasonable price) stocks with steady earnings. We don’t have a lot of technology but if technology started to do better, you would see that in the PC cycle and then we would start buying more tech stocks. We have a lot of industrial stocks. The financial stocks that we have are for the most part insurance companies and we have a lot of international companies trading as ADRs. Q: How is your research process organized? A: Generally, the daily financial data analysis takes 2½ hours to run all the models and what I end up with is about seven pages of report with stocks ranked by sector. We always view the existing portfolio against all of the possibilities and we believe this is what differentiates us from most of our peers. A lot of managers look for a stock and say that they like it and then they have to figure out what to sell out of their existing portfolio. And if they really like all the stocks in the existing portfolio they may not buy the new stock. We try to weigh all the stocks in the portfolio against all the options every day and that has the advantage that our portfolio doesn’t get stale. Q: How exactly do you weigh your existing portfolio against all options? A: Essentially, we have a portfolio of stocks which has a certain projected return and certain volatility. We are trying to figure out if stocks under consideration will add to the return and reduce the risk of the portfolio. If the returns or risk reduction are high enough, then the stocks will get a high rating. We want stocks that add to the return and reduce volatility or, in other words, we are constantly doing is trying to get the highest sharp ratio possible. Q: What drives your buy and sell decisions? A: Decisions to buy securities are based on the expected return for the next twelve months as well as the impact of that holding on the fund’s overall return/risk profile. Decisions to sell are based on changes in the valuation of that security or better return/risk alternatives. Historically, we have preferred securities with low price to earnings multiples. The stocks at the bottom of our list are the ones that have high volatility and low returns - those are the stocks that we look to sell. The stocks at the top have the high returns and low volatility and would be the ones we would like to buy. A few weeks back, for example, Coca-Cola scored well enough to be noted but not well enough for us to buy. But I still like this company for a lot of reasons. It is a global company and extraordinarily profitable business. Q: You mentioned that you have quite a bit of exposure to foreign companies. What’s the reason behind it? A: About three months ago foreign businesses were producing higher returns that were less correlated with domestic returns. Generally, volatility in the foreign markets is higher than it is in the United States because the United States is considered a safe haven. As the foreign stocks are starting to pick up more volatility and become riskier, we are getting less of those coming through the screens. Three months ago probably 80% of the stocks coming through the screens were foreign ADRs and today they are probably less than 30%. Our models are adjusting to the overall volatility and return profile which I look at every day. Q: What’s your portfolio turnover? A: The turnover is a function of the overall volatility of the markets and the type of stocks that you are buying. Our turnover in the past has been as high as 300%. This year it is running on an annualized basis near 60%. When we had 300% turnover we were investing in a lot of smaller companies that are quite volatile and they jump around so you get frequent opportunities to buy and sell them. Q: How many stocks do you typically have in the portfolio and are they all equally weighted? A: We generally hold somewhere between 120 and 140 stocks but it depends on the nature of the stocks. If they are small stocks, then we want to own more stocks; if they are larger companies, then we can afford to own less. We don’t try to do sector diversification. The models that we use help us with that so we are not going to end up in a situation where we are 50% or 60% invested in a sector. The weightings are put upon the volatility of the companies and that’s all calculated for me. We put as much effort into mitigating volatility as we do on returns. The models that we use generate returns on the stocks based on the characteristics that they have. The expected earnings revisions upward or downward have a big impact on our ranking system. We also try to take into account as much as possible and incorporate as much of the latest research as possible into what we do. Q: How do you control risk? A: We are always comparing our existing portfolio with a potential stock that we want to buy to see whether it adds or subtracts to the volatility and actually how much it adds or subtracts to the overall return of the portfolio. Overall, in terms of risk controls, we measure the volatility, we look for ways to spread across as many names as we have and we anticipate what the trends are evolving in the market and take corrective actions. Q: What are the sectors that you would rather stay away from? A: One good example would be the coal companies. This is partly because coal companies typically do well when natural gas prices are high because they are a substitute for natural gas. I think when a coal company is really doing well natural gas got up to $18 per MCF and I saw today it was about $5.50 per MCF. So now natural gas is really cheap and then it also has a lot to do with whether a hurricane is going to hit the Gulf Coast and things of that nature. I think the coal companies are pretty toxic at least for the time being. A lot of the thrifts or banks have made their money on mortgages. There’s not going to be a lot of mortgages going in the next few years. And no one makes money on foreclosures. So that would certainly be another toxic area for us.