Q:  What core beliefs drive your investment philosophy? A : Worldwide markets are generally efficient over time, but investor behavior creates volatility that leads to inefficiency somewhere in the world. Our investment philosophy stems from two basic beliefs: 1) country and industry factors are important determinants of security prices, and 2) global market fluctuations produce returns that generally fall in a log-normal distribution. Normal volatility results in the overvaluation or undervaluation of the cash flow or asset value of companies from time to time. We employ an unconstrained pure value equity selection process that is characterized as an active, all-capitalization investment approach. We believe that the best way to generate above average risk-adjusted returns is to wait for market fluctuations to produce undervalued companies. The fact that stock price movements do not correspond with a company’s long-term fundamentals allows us to profit by buying when the price is deflated. We often find that the most undervalued companies are those that have strong sustainable streams of free cash flow, but are in disfavor in the market. We focus on free cash and the use of the Polaris Global Cost of Equity to discount cash flows to determine if the investment offers an attractive rate of return. The approach utilizes bottom-up research to uncover the most undervalued streams of free cash flow in the world. Identifying these streams of sustainable cash flow (e.g. companies) requires a “statistically patient” investment process. Q:  How do you define “value?” A : Our strategy combines intrinsic, turnaround and free cash-flow based value. Philosophically, our process is to invest in companies whose current valuations do not reflect the cash flow that the companies are capable of producing over time. Since the companies that typically enter the portfolios generate strong sustainable free cash flow and often have conservative balance sheets, these companies are capable of growing stronger in difficult economic times. In order to implement this process, each company’s valuation model is based on current cash flow from operations and a conservative 0% to 2% terminal real growth rate. However, many companies in the portfolios do grow faster than the assumed real growth rate. In such cases, the market’s valuation of the company can increase substantially as the market’s assessment of growth moves from pessimistic to optimistic. Q:  What are the elements of your investment strategy? A : We utilize a bottom-up investment approach and theoretically stock selection is the primary driver of performance. In a rough estimation, performance can be attributed to security selection (60%), sector allocation (20%) and country allocation (20%). The Polaris Global Value Fund develops a dynamic portfolio of 50 to 90 equally weighted securities from a universe of more than 30,000 companies in more than 100 countries that pass fundamental research criteria. We will invest in common stock of any size company in any country or sector that meets our investment criteria. Country/sector/industry weightings result primarily as a fall out from fundamental research – identifying the most undervalued stocks in the world. We may invest in emerging or developing markets not included in the MSCI World Index. We do not invest more than 25% of the total net assets in futures contracts or put options, and limit illiquid securities to no more than 15% of the total net assets. The portfolio is typically invested in fifteen or more countries and industries. In addition, we like to make sure that holdings in those countries or industries are not substantially correlated with one another in terms of cash flows or end demand. Q:  What analytical steps are involved in your research process? A : We use a three-step investment approach, which attempts to identify companies with the most undervalued sustainable cash flow or assets worldwide. Our investment team assimilates the global investment environment using quantitative, proprietary investment technology combined with Graham & Dodd style fundamental research. Step One: We have a five factor global valuation investment technology model that evaluates aggregate country or industry data such as cash flow and interest rates to produce a ranking of country and industry value sectors. This step is based on the belief that country and industry factors are important influences on security prices. Step Two: This step is based on the belief that normal security price fluctuations can undervalue the cash flow or assets of a company. Using traditional valuation criteria, we regularly screen a database of 30,000 global companies to produce a list of approximately 400 companies that appear to be the most undervalued in the world regardless of sector or location. Screen criteria include the valuation of a company’s sustainable free cash flow relative to the Polaris Global Cost of Equity, financial strength, market capitalization, liquidity and margins, among other criteria. Step Three: In the final step, we conduct rigorous fundamental research on the companies identified. Fundamental research covers financial analyses of companies including: in-depth financial statement analyses; research of suppliers, customers, and competitors; and visits and/or contacts with company management, competitors, suppliers and customers. We assess industry conditions, competitive advantages, profitability, operating and financial leverage, and the quality of management. Our analysts use the Polaris Global Cost of Equity discount rate to value each portfolio investment in the course of this fundamental analysis. We apply the discount rate to extremely conservative estimates of future cash flows to determine the fair value of the investment. If the current market price of the shares is at or below the fair value of the shares, and the company has withstood the scrutiny of the fundamental analysis, the company is a buy candidate. Q:  Can you illustrate your research process with a couple of examples? A : Avoiding the pitfalls of investor panic and the drive to ultra-conservative investments, we carefully analyzed our portfolio by selling challenged companies in favor of long-standing fundamentally strong holdings. In the case of The J. M. Smucker Company, the maker of jams, preserves and other fruit spreads, the stock price declined substantially in 2008 and remained depressed in 2009 even when markets rebounded. However, the company held a two-fold attraction for us: 1) great brands, a terrific management team and strong niche market share and 2) Smucker bought Folgers Coffee from Procter & Gamble. They also obtained a 25-year license to market Dunkin’ Donuts coffees in retail stores. The accounting for the exclusive right on the Dunkin’ Donuts deal created volatility in the stock that provided an entry point in the stock. In essence, Smucker was a fundamentally stable business with an undervalued stock price. We bought the stock in April 2009 and by the end of year it was up 64%. Smurfit Kappa Group, the Irish producer of cardboard boxes, remained one of the most undervalued materials companies in our portfolio. Feeling the impact of macro-economic conditions, the company was trading at 1X free cash flow. Despite that, we bought more of the stock in the first and second quarter of 2009 and the stock surged 250% by the end of that year. A more recent example would be Novartis, a successful Swiss pharmaceutical and healthcare products company with a franchise in cardiovascular and oncology drugs. A high percentage of recent sales are from drugs developed in the past two years, and the influence of the faster growing emerging markets is having a favorable influence on results. Selling at an unusually low price to maintenance cash flow, we purchased the stock in the second quarter 2009, which has subsequently risen more than 30%. Infosys is an Indian company that is a well known leader in global information technology solutions. Essentially a provider of outsourced IT services to hundreds of companies throughout the world, Infosys services an entire range of issues that confront large companies. The company has enjoyed a fast rate of earnings and cash flow growth, but the worldwide economic crisis temporarily depressed revenues and earnings. An accompanying stock price decline provided an excellent opportunity to invest in a company likely to benefit from the resumption of growth expected in 2010 and beyond. Since purchasing the stock in the second quarter 2009, this holding has risen over 95%. Q:  What is your sell discipline? A : The decision to sell is primarily based on a company’s common stock valuation and the extent to which the expected return on the stock meets the Polaris Global Cost of Equity. Certainly, we do sell when a stock appreciates to its target price. On the other end of that spectrum: when the valuation of the stock no longer is priced to include the 2% alpha, our sell trigger kicks in. If our investment analyses, financial models and assumptions change over time, the buy and sell prices are altered to conform to actual company results and the value is re-assessed. Companies that no longer meet the global valuation criteria are replaced from a watch list of over 250 prospects. Q:  What risks do you perceive in the portfolio and how do you manage them? A : There is no question that foreign investments involve certain risks, including different economic, financial, political and social factors. With respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, imposition of exchange controls, social instability and political developments that could affect investments in those countries. Since the Polaris investment process incorporates real bond yields in its valuation hurdle rates, the investment process rationally and consistently evaluates the risk of such markets using observable market determined risk premiums. On a portfolio design level, the primary risk of a pure value strategy is investing too early in an investment opportunity. Investments are made when catalysts are visible and likely to have a near term impact on the candidate for investment. We try to measure risk by tempering our expectations for a company, modeling conservative estimates of future cash flows. Therefore, even if our rational assumptions for a company prove unattainable, our estimates have already built-in the “worst case” scenario. We only purchase companies that prove attractive even after this draconian modeling. The entire investment process seeks to minimize risk and includes a number of checks and balances against risk. Risk is measured using the beta of monthly returns versus the appropriate benchmark; the beta has been low, between 0.6 and 1.0 measured, inception to date. The firm believes this demonstrates the validity of using the Polaris Global Capital Cost of Equity as a way to manage risk and return. To further control risk, portfolios remains well diversified with investments in at least 15 different industries and countries. Q:  Has the financial crisis of the last two years somehow impacted or changed your investment process? A : As a bottom-up investment manager, we focus on individual company fundamentals, rather than top-down macro-economic conditions. Though the overriding influence in stock selection and Fund positioning is derived from the valuations of global companies and thorough Graham and Dodd style fundamental analysis, we recognize that an understanding of world valuations and the position of different economies and societies can provide valuable insight. This was never more evident than in the past two years, as global economies suffered. In the past few years, our research has increasingly focused not only on company specifics, but also on each company’s navigation of global economic and market conditions. This has broadened the scope of our investment check list. We have also projected additional volatility in our financial forecasts, building models that incorporate more cyclical risk inherent to global economies. Outside of these actions, we remain disciplined and committed to our deep value investment process, which has been honed over the past 25 years.