Q:  What is your investment philosophy? A: We are an absolute-return oriented fund, and our goal is not to lose less than someone else but to make money for our clients. We believe that the most important rule is not to lose your clients’ money. We are flexible but we gravitate towards large cap value. Another important characteristic of the fund is its concentration. We strive to own very few stocks. The top 10 holdings plus cash represent about 50% of the Yacktman Fund (which contains 30 to 40 stocks) and 75% of the Yacktman Focused Fund, which is invested in about 20 stocks. Our discipline is a defining characteristic of our firm. Back in 1998 and 1999, when everyone was chasing tech stocks, we were criticized because we resisted change. But in the last five years, we've doubled our clients’ money, while many other managers have lost money on a total return basis. When we have disappointing periods, it is usually not because of the underlying companies, but because of some short-term market phenomenon. Q:  Why do you believe that owning a limited number of stocks is a better way to manage money? A: We want to put most of our money in our best ideas, not in our fiftieth best idea. There is usually a strong relationship between our largest positions and our best performing holdings. We would rather own fewer companies and know them well. Q:  How do you implement this philosophy into an investment strategy and process? A: Our strategy can best be described as a triangle. The base of the triangle is a low purchase price, meaning we want to own a business that's selling below its worth. If you buy a great business but overpay for it, it becomes a bad investment. Buying cheaply is critical to our strategy. In determining the value of a company, we take into account cash flows, earnings, growth prospects, quality and predictability and put them all together. We assign a forward rate of return, or the annual appreciation we feel the investment can earn. They should be well in excess of the expected returns on the long-term Treasuries. We rarely enter into a new investment when the forward return is below 10%. The second part of the triangle is what we call a good business. We try to invest in businesses that have high returns on tangible assets or businesses with low fixed asset requirements and less cyclicality. This approach leads us more towards consumer and service types of businesses, although we invest in other businesses as well. Liberty Media, currently one of our biggest holdings, has low capital requirements but some economic sensitivity. A couple of years ago we bought a lot of Qwest bonds. Qwest is in a business with many fixed assets but very little cyclicality or economic sensitivity. We tend to avoid businesses that are heavy in capital needs and are highly cyclical, such as airline companies. We invested in Qwest bonds when the common stock was selling at about $5 and the bonds were selling at about 50 cents on the dollar because of concerns about potential bankruptcy. At the same time, telephone lines were trading in private market transactions at $2,000 to $3,000 per line. Behind the bonds there were more than 17 million telephone lines, so if you owned the company for the value of the debt, you were paying about $500 per line. The bonds went from below 50 cents on the dollar to near par. At that point we sold the bonds because their forward rate of return was lower than our hurdle. Whenever we buy a bond, we’re more interested in the equity returns than bond returns. Shareholder-oriented management — or management with rational behavior in reinvesting the cash flow — forms the third leg of the triangle. We have a very long horizon time, so what the management does with the cash makes a big difference over time. Q:  What kind of reinvestment strategy do you expect from the management? A: Basically, there are five options for reinvesting the cash. First, cash can be used to make sure that the good parts of the business are protected and growing. The second option is to make acquisitions of companies or businesses that are hopefully synergistic ones for which the company does not overpay. The third option is to repurchase common stock, which means just buying more of the same stocks already purchased in the past. Fourth, you can pay dividends. The fifth option is to pay down debt or let the cash pile up. Dividends used to be an unappealing alternative, but with dividend tax rates currently in line with capital gains, paying dividends is not nearly as bad an option as it used to be. Dividends also lower the value of stock options, which we believe are normally a bad deal for shareholders. Q:  You invest in the large-cap part of the market, where most of the fraud has occurred recently. What is your strategy for protecting your investors? A: We carefully evaluate the businesses with negative publicity, to make an assessment that separates the headlines from the business value. In the fourth quarter of 2004, we made five investments, two of which were large additions to existing holdings of Pfizer and Coke. We also purchased Colgate, Marsh & McLennan and Cardinal Health. Virtually all of these stocks had plummeted as a result of negative attention from the media. We separate the ones we have confidence in and focus on them. We must be patient after buying them because sometimes it takes a while for the bad publicity to stop influencing the stock price. At times they go down even further, which can give us an opportunity to purchase even more. In 2002, we established a 10% position in Tyco at approximately 10 per share as the headline risk massively obscured the value of the businesses at that time. And even though we do our homework, I guarantee that we'll make mistakes. Being wrong is inevitable in this business. Q:  Do you think that the change in technology may lead to a change in the distribution of advertising dollars? We've seen the transfer from radio to TV. Could we be now witnessing the transfer to more personalized Internetbased content? A: The risks associated with this shift are becoming evident. While there used to be only three networks, now a local newspaper or two, there are now a wide variety of ways to reach the consumer. Also, TiVos and DVRs enable users to fast forward past advertisements. So, yes, the current environment poses challenges to advertisers, and many have shifted their efforts to the Internet, despite its flaws. Over time, however, marketers will use time-tested scientific methods to scrutinize statistics and gradually adapt their strategy to the available opportunities and options. However, choosing among Liberty Media, Viacom, Google or Yahoo! is very different than choosing among U.S. Steel, General Motors or United Airlines, companies that have enormous amounts of capital and vulnerability. We believe that it is important to be in a pool of decent businesses, because if you end up purchasing above average businesses at below average prices, on average it is going to work out. Q: With such a concentrated portfolio, I guess that your research process is extremely important. How does your research differ from that of other organizations? A: We do a lot of our own homework and we have some helpful proprietary tools. From time to time, we use other people's information to accelerate our learning, but the decision making is done on our own. Our main goal is to understand the business and what we own. We don't spend much time trying to divine the direction of the stock market. We focus our attention on the business through very analytical and rational decision making. Q:  Do you talk to competitors and suppliers to gather industry knowledge? A: Yes and no. As a result of focusing on one company, we start to spread out and look at other companies in the industry. Our position in Liberty Media, for example, came as a result of some work in other media companies. We try to read as much as possible and do look at what others are doing to see if it is potentially a good investment. There really is no monopoly on good ideas. Q:  How do you approach portfolio construction? What is your buy/ sell discipline? A:We look at individual businesses and continue to buy until we have a meaningful position. We aim for some diversification, and there are certain limitations in our prospectus. We think it is overdone to invest in an industry only within a range of the S&P representation of that industry. We avoid many industries because we would rather invest 100% in good businesses. Yes, there are times when those industries are doing well and we may look foolish in the short run for not purchasing those companies. But we have a 10-year time horizon, and we're not focused on the one-year numbers. We spend most of our time filling our portfolios with great businesses rather than diversifying to look like S&P 500 or some other benchmark. Our sell discipline is to exit, usually at a gradual pace, when the forward rate of return gets lower or when we feel that the company is fully valued. We had 10% of the portfolio in Tyco stock when it sold in the low teens. But when the price rose to the $30s, we cut it to 3% of the portfolio. When a price goes skyward we tend to be less excited about the investment return going forward. Q:  What are your risk control measures? How do you perceive and manage risk? A: Buying a business well below its worth is the best way to control risk. We need some diversification, and we don't have all our money in one or two stocks, but diversifying for the sake of diversification is not nearly as effective as monitoring the price levels at which we buy.