Q:  How would you describe your investment philosophy? A : Our core belief is that investors can reap the most benefits from a portfolio that is diversified not only by asset class and sector but also by region. The firm’s low expense equity fund is designed to serve as an investment vehicle for U.S. investors looking to add international diversification to their portfolios through European equities. We believe that the European emerging markets will continue to grow faster than developed or established markets; and stronger economic growth would lead to faster earnings growth that will reflect in higher market valuations. Companies in emerging Europe are still in the early phase of growth and offer attractive long term returns. Q:  What is your investment strategy? A : The fund normally invests at least 80% of assets in equity securities of issuers organized or headquartered in emerging countries of Europe, including but not limited to Hungary, the Czech Republic, Poland, the states of former Yugoslavia, Bulgaria, Romania, Turkey, the Baltic countries, Russia and the former Russian Republic countries located in Europe. We invest in countries forecast to expand at a greater rate than developed economies. Q:  How do you conduct your stock allocation process? A : We invest in companies and markets in Eastern Europe that are no older than 15 years and we consider stocks across many industries and market capitalizations. In terms of market cap, with the exception of the 50 large cap companies, most will fall into the small to mid-cap category. In terms of countries, currently one-third of the stocks in the portfolio is allocated to Russia, another third in Poland and the rest gets distributed over the smaller markets – Czech Republic, Hungary and Austria and further smaller allocations in Turkey and Romania. In terms of index eligible securities, the allocation is somewhat similar and we like to emphasize, when appropriate, our exposure to central and eastern Europe through the Polish market. The Polish market is the most liquid and has the largest number of stocks and is obviously the largest outside of Russia in terms of market size and population. But last year was a deviation from the usual distribution as we reduced our Polish exposure by half to compensate for our Russian overweight. Q:  Could you illustrate your research process with some examples? A : Our stock selection approach utilizes a combination of top down and bottom up analysis. We start with an evaluation of economic conditions, singling out sectors of interest, and a proprietary quantitative model that screens and ranks securities based on valuation and momentum. Once the model generates a list of companies with the most attractive metrics, we conduct in-depth qualitative analysis, which often includes visiting companies on-site and meeting company management. The first phase of our research process is a quantitative process where we tend to assign stocks to three major categories – attractive, neutral and unattractive. This is generally based on a combination of valuation (price-toearnings or price-to-book, for example) and technical/momentum measures. We rank those stocks and tend to look at only the attractive ones which is the top third of the universe. The second phase would be the qualitative type of analysis of meeting management and having a more in-depth look into their business. Generally, large cap, more liquid stocks go through a quantitative screening process and for small-cap companies we tend to apply more of a qualitative process such as speaking to management and analyzing their financial statements from a cash flow perspective, especially if we don’t think the quality of earnings is reliable. We are very cognizant of valuations. We won’t invest if valuations point strongly against it. We can sometimes justify paying a premium for a stock versus peers or versus the sector if we feel that the market is underestimating its future growth potential. For instance, the banking sector in Russia will be more influenced by the state and we therefore conclude that we will probably put more weight on what we think the relative standing of that Russian bank is with the government. In 2008, it was very important to know who gets access to funds and who doesn’t; who is encouraged to make loans which eventually might turn into non-performing loans and who isn’t. Therefore, we chose to stay outside that sector in Russia. In the specific case of investing in Russia, there is some discount risk to those stocks as we found that the state tends to do a worse job than the private sector. But there is a positive flip side to that: a place like Russia does provide a stable, political environment from the top down perspective. In deciding some of the risk premium, we had to take into consideration things like that. The same holds true for a sector like energy. Q:  How do you identify small and large companies with growth potential? A : Small companies in our portfolio can grow in many ways that are not always evident. We gather knowledge on these companies early in their growth cycle through our local contacts in the analyst communities and industries. Some of these companies can really do well from an equity performance standpoint, whether it is because there is potential or they are a good takeover candidate or whether the markets underestimate the potential when it comes to market penetration. For instance, going back ten or twelve years in a place like Russia, cell phone penetration in the large cities was pretty low. Today, places like Moscow and St. Petersburg have 100% penetration. So if we are not aware of the dynamic of those markets we can underestimate the potential for growth. Spreading cell phone use in one of those countries was tough because there were current shortages and there was always a long line of people favoring the regular, oldfashioned kind of phone. When larger companies like Vimple-Commnications and Mobile TeleSystems OJSC started marketing aggressively, they kept surprising investors with new customer additions (growth). When we invest and analyze stocks, we try to incorporate those kinds of intangibles that we may not really glean by looking at numbers. But knowing the region and its background, we know that there is demand for certain services. The consumer sector is another great example for the region. Even though we don’t completely favor it now, if we look at a furniture retailer IKEA’s Moscow store, it had the highest foot traffic in its entire worldwide network of stores because it had a vast choice of furniture and other household items. As long as we have this continued growth of income and standard of living, we will see such services and companies popping up. We take advantage of this growth by investing in consumer stocks of some of the large retail chains or in the case of cell phones obviously some of the large telecoms. Q:  How do you deal with the volatility in emerging markets? A : It has been a challenge. Volatility adds a lot of risk when it goes against you but it also helps significantly on the upside as well. So if we manage to take advantage of the upside and capture less of the downside then obviously we are doing a good job. The general answer is emerging markets, and in specific emerging European equities, probably should never be a major part of a portfolio unless the risk-return-objective is justified. This is more of a satellite type holding that varies depending on the type of investor and what kind of allocation they are prepared for in terms of portfolio risk. We think that emerging markets and eastern European markets should be an important part of any portfolio allocation. Our belief is that stronger growth is going to lead to better returns over time. That doesn’t mean we have to buy stocks every time and at every price. If the market is underperforming and there is not much of an upside in terms of valuations, we think it is probably wiser to wait for a better opportunity. Q:  How much liquidity is available in your fund at any given time? A : The percentage of funds that we keep liquid tends to vary. We are generally fully invested but at a time that we feel there aren’t enough good opportunities, we could park some money in cash and wait. Generally, we wouldn’t have more than 15% in cash. We want to be very cognizant that if markets continue to rally we are going to miss out on them on the beta component and underperform. We are careful to make sure that we stick to a mandate of investing in emerging Europe but our overriding goal is to generate the best return with cash and at times that requires holding a larger than normal cash position. Q:  Can you give us one or two examples of historical holdings? A : For instance, there was a company called PetroKazakhstan which, at the time, we thought was really cheap. There was an ongoing negotiation between China and Kazakhstan to build a pipeline and we thought that when eventually they do build a pipeline there should be companies in Kazakhstan that are going to benefit from that. So we looked at the universe of available Kazakh oil companies and we decided to invest in PetroKazakhstan which appeared the most attractive at the time and based on the premise that once the oil starts flowing companies like this will get better revenues. What we didn’t really anticipate though, was that PetroKazakhstan was also an attractive takeover target for a Chinese company, which ended up buying it and we consequently made more than we were targeting. Other general examples could be our holdings in mid- to small-cap companies in some of the less prominent markets that we transact in Romania, Turkey and Kazakhstan. Those are the names that we invest in because we feel that they haven’t been recognized by the rest of the market yet. Q:  Could you explain your portfolio construction process? A : Our benchmark is the Nomura Central and Eastern Europe Index. Generally, the number of stocks in the portfolio is going to vary between 60-65 companies. When we feel like adding more risk on the small and mid-cap size then that number is going to increase closer to 90 and we will probably add 0.25% in the portfolio of each one of those companies. One, from a risk measurement perspective, we never want to own a significant portion of any company’s free float, and second, we want to diversify individual name risk in small companies; the range is between 60 and 90. Our portfolio tends to have a very strong growth profile with our small cap exposure not exceeding 20% of the portfolio and the rest is going to be mid- and large caps which we tend to hold for long periods of time. Some of the large telecom companies like Mobile TeleSystems and Vimplecom or large banks like Bank Pekao S.A. in Poland and OTP in Hungary will be the kind of holdings that will consistently show up in a portfolio; maybe different weights at different times but they would be part of the core of the portfolio. Regarding the buy decision, generally the portfolio manager has the ultimate say. He takes in the input from that first quantitative screening and further qualitative research that is done by our analyst team to narrow down the universe of stocks from, for example, a sector of 15 telecoms to three or four which will eventually be candidates for inclusion in the portfolio. On the sell side, if we originally bought a company because we liked the management and then a change in that management is going t