Q:  What is the history and investment philosophy of the fund? A : The PNC Small Cap Fund was launched on April 2, 2004, and we currently have about $170 million in assets under management in the fund. Rooted in a strict buy-and-sell discipline, our investment philosophy focuses on business models that throw off excess cash flows and are preferably growing a stream of cash at a healthy pace. The investment objective of the fund is to provide long-term capital appreciation by primarily investing in small cap companies. Q:  How do you build your investment process around this philosophy? A : Our selection process is driven by company fundamentals and we make one investment at a time. We primarily invest in U.S. companies with market capitalizations between $100 million and $3 billion. Investing in small cap offers two main advantages – the companies in this market sector tend to be underfollowed, and there is also a high degree of company ownership by management. Looking at the cash flow metrics of small cap companies over 5, 10, or 20 years, helps us in tracking and identifying winners and losers as we seek to find companies that are growing organically. We drill down into companies to understand how much stake the management owns, how they are compensated, what motivates them, and how long they have been there. Overall, we want to be long-term owners of businesses growing their cash flow and reinvesting it into the most profitable opportunities within their businesses to create value for their shareholders. Q:  How do you go about finding companies? A : We firmly believe that companies with improving cash flow metrics trading at attractive valuations offer the best opportunities within small caps. Thus, we begin by screening the universe of small cap stocks in search of companies with improving cash flows. Then, we drill through the three metrics that a company controls to improve that cash flow rate of return - sales, margins and asset utilization. Once we have screened our universe, we dive deeper into the company-specific metrics looking for businesses with lower debt and high insider ownership along with other quality characteristics to develop our thesis about the company and its drivers around how it will be monitored. Q:  What is your buy and sell discipline? A : First of all, we buy companies that are generally improving their cash flow rate of return. We want to see at least 20% upside in any purchases we make. Also, we prefer to invest in companies with low debt and easy-to-understand management policies. We try to separate the valuation process into two components. We want to see if the company-specific data will continue to improve over time, and then determine the appropriate discount rate which includes the current taxes, inflation and risk environment along with company specific adjustments for cap size, leverage and volatility. We realize that a lot of the volatility is created around perceptions to taxes, inflation and risk. As the company-specific data continues to improve, the cost of capital changes over time, but those price targets can move up as well. To take those changes into consideration, we continuously stress test them because we realize that there is volatility throughout the year. In this way, we will stress test different economic conditions, raise the cost of capital and invest in companies that are likely to continue to thrive. We always set a target price that reflects how a private transaction will affect the value of a particular company. We set the price target for a stock that we buy to sell based on stress test and optimistic market and business conditions. Again, those targets can change with time after the cost of capital, taxes, and risk profiles change. Because we consider ourselves a buyer of a business just as you would in a private market transaction, we apply the same discipline whenever we buy a stock of an undervalued company. Q:  How do you build your portfolio? Are there any specific sectors that you avoid? A : Our portfolio construction process is very much driven from a bottom-up perspective with specific guard rails and risk parameters. We use the Russell 2000 Index as our benchmark and we limit ourselves to plus 10% to the sector benchmark. Right now, we are 8.5% overweight in industrials, mostly in aerospace names. We limit ourselves to 5% in any one holding and we currently have only a couple of names over 4%. The number of holdings in the portfolio will range between 45 to 70 names, with the current number gravitating around 50. From a process standpoint, some sectors do not fit as well as others because we like companies with consistently growing cash flows and recurring revenue streams where possible. For example, there are many companies like biotechs in the small cap space that do not have revenue at this point, and we will generally stay away from them from a risk profile standpoint. Among other companies that we may want to stay away from are short cycle technology businesses with limited foreign customers. Such companies maintain a very volatile profile because they may have very high returns over two to three years, but then we have to wait for them to recreate that cycle. This combination of volatility and risk does not meet our selection criteria. Historically speaking, REITs have not fit well in our process simply because of the tax rules around them and their inability to reinvest the cash flow as it has to be paid out in dividends. Utilities have occasionally been part of the portfolio, although they not only have relatively flat return on investment, but they are also highly regulated and leveraged. Q:  What are the primary risks that you consider and how do you mitigate them? A : In our opinion, risk comes down to volatility in the return on investment profile of companies, not the stock price. However, we believe these risks can be controlled by having companies with more diverse client bases, understandable business models and some consistency on the revenue stream. We also want to limit risk by understanding management – how much of the stock they own and how long they have been around. We will always refrain from owning companies managed for the sake of earnings on a quarter-to-quarter basis. Additionally, we have a maximum of 5% cash in the portfolio and we do not do a lot of market timing. That gives us an opportunity to add to a holding or put a new one in the portfolio if opportunities arise while maintaining low turnover levels.