Q: What are the core beliefs that constitute the investment philosophy of the fund? A: Traditionally, we would be classified as a growth at a reasonable price fund and there’s a definite value bias to that philosophy. We like growth stocks but wouldn’t pay unreasonable prices for those issues. We want to see evidence of growth, whether in revenues, earnings, dividends, or some combination of these, that is higher than what is reflected in the price of the stock. We also look at the balance sheets and we like to have sufficient liquidity in the stocks so that we can go in or out of a stock relatively quickly if necessary. For example, we did not buy much technology stocks until there was a crack in the technology market in the mid 1990s. At that point, all of a sudden the valuations were looking a lot better and we were able to load up on technology. That worked very well for us and we sold them once the technology bubble began expanding. It was a nice position to be in because we could just ride the stocks we already owned. Our primary benchmark is the S&P 500 as we invest almost exclusively in large-cap domestic equities. Many of our holdings overlap with the S&P 500 but we don’t just follow the index. We have holdings outside the index and we feel free to both overweight and underweight any individual names in the index. The core portfolio, or 50% to 70% of the names, is structured similarly to the S&P 500, while the remaining part is where the GARP approach comes in. Q: Fundamentally, why do you consider that approach to be a better way for managing money? A: At the end of the day, the performance of the portfolio is related to the performance of the individual securities. The price of those securities is a function of the earnings, the cash flow, or the dividends, so you need the growing metrics of the fundamentals to support the growing prices over the long term. Certainly, there are situations when there are opportunities on a price basis. If a company’s price has gotten far out of line with the fundamentals, there may be an opportunity with a company that doesn’t have the growth dynamics of its competitor. But in general, I would much rather own shares in a company that’s growing at 12% to 15% than in a company that’s only growing at 2% or 3%. Q: How do you find and distinguish these companies? I guess not every company with 12% growth would be a candidate for the portfolio. A: Our mutual fund is managed on a team basis. I am the lead manager of the fund but I have very good support from the co-workers who assist me in that process. We divide the research responsibilities by economic sectors. I follow two sectors, there’s a gentleman who follows three sectors, and a couple of people follow one sector each. In addition to the analytical responsibilities for those individual sectors, they are also portfolio managers for other accounts of our firm. So they have the micro focus on the sector as well as a macro focus on an overall portfolio. Each of the team members has individual bias in terms of looking for and evaluating opportunities. It’s a dynamic process, and because of the differentiated approaches, it generates some interesting discussions during our stock selection committee meetings. For example, I am a big proponent of relative P/E analysis when identifying the stocks in my area of coverage. That may not be as appropriate for the person who follows the energy sector, so he may be using entirely different metrics. There’s an analyst who is very big on enterprise value-to-EBITDA as his primary method of valuation. Once we start combining, mixing, and matching those metrics across sectors, we get a more complete picture of the opportunities in any individual stock. So the identification is left to the analyst / portfolio manager who follows the sector but as portfolio managers, we are all exposed to a lot of information across various sectors. If there is an issue that intrigues us, we make sure to point it out to the person who’s responsible. There is no internal mechanism that says we can’t take a look at opportunities outside our sectors. If I feel there’s an opportunity in an energy stock and the energy analyst doesn’t, I would still look at it and try to make a case for it. Q: Do you follow thematic investing or do you prefer the stock-by-stock approach? A: We combine both a top-down approach as well as bottom-up analysis. We are top-down in terms of areas or economic sectors that we’ll be emphasizing or deemphasizing. A good example would be the market in late 1999 and early 2000. As the technology sector had been an incredible performer for at least five years, we felt that valuations were getting overextended. Our weight in technology had gotten up to around 30% of the total portfolio but since we felt that the situation was not sustainable, we effectively cut our technology exposure in half. It was probably a bit early but when the tech bubble burst, our portfolio was better positioned because of that top-down analysis. On the other side of the coin, the bottom-up approach can provide some insight into what sectors might be appropriate to look at more extensively. Also, although there’s no policy of what the weightings of the sectors should be, we always have some exposure in the major sectors to hedge the risks. I’ve been in this business for 25 years and I’ve learned that I can be wrong so I want to have the best names in the major sectors even if I’m not confident that those sectors are going to outperform. The bottom-up approach allows us to pick the best names in the sector and the top-down approach helps to identify the sectors that are going to do better. Q: In terms of the portfolio construction, how many securities do you hold? What’s your buy and sell discipline? A: We hold between 60 and 80 names at any one point in time. Regarding the buy discipline, we have regularly scheduled meetings of the stock selection committee where new ideas can be presented and existing holdings are reviewed. We’re all located in very close physical proximity so if somebody has an idea, we can pull a meeting together that isn’t scheduled and take a decision very quickly. In terms of the sell discipline, each individual manager/analyst maintains target prices for the various companies in the portfolio. If a stock reaches its target price, it isn’t automatically sold, but we would definitely review it to make sure we’re not missing anything. If we agree that the security has reached its full potential, we take active steps to look for a more undervalued candidate to replace it. On the other hand, if we feel that a stock becomes tremendously overvalued, we won’t hesitate to pull the trigger and get out of it immediately. Q: What is the portfolio turnover? A: We are very sensitive to the needs of our shareholders and many of them are taxable shareholders. As a result, we try to maintain our holdings so that the gains coming from the fund are long-term in nature. When we purchase a stock, we are looking at a holding period of at least two to three years. Last year I believe that our portfolio turnover rate was about 15% but that was unusual. On a normalized basis, I would expect the turnover to be in the 20% to 25% range annually. Q: Would you give us an example that illustrates how an idea becomes a research topic and then a holding? A: Gentex Corporation is a name that you may not run across too often. It manufactures the automatic dimming rearview mirrors for vehicles. We have had larger and smaller positions in that name for quite a long period of time. It was identified as an attractive opportunity by a manager who has retired. At that point the company did not have great penetration of their target markets, but we felt that there was a good opportunity in the years ahead. So we kept an eye on it and we ended up buying it at a reasonable price. Their product achieved success and the company not only started to provide the interior mirrors, but also added telematics mirrors with temperature gauge, this increasing the dollar content involved with that mirror. Then they developed outside mirrors so their market was expanding. We’ve let the position grow along with the company and we use price fluctuations to increase or reduce the position size. Q: What was the factor that initially attracted you to the stock? Why did you believe in that expected growth rate, especially in the difficult auto market? A: It really has only one significant competitor, and based on our research, we felt that Gentex had the superior product. They are certainly impacted by the OEM manufacturers squeezing their suppliers, but since Gentex was basically the only game in town, they did have some protection against being squeezed. And we’re not talking about a commodity type of product but about a product that required manufacturing Q: What kind of risks do you perceive and how do you mitigate them? A: We’re always going to be exposed to market risk. From a portfolio perspective, one of the main tools that I use is the cash cushion. With a relatively optimistic outlook, we will be running with fairly low levels of cash. If our outlook on the overall market is less rosy, I will not hesitate to raise cash to significantly higher levels. Currently we’re running above normal cash levels, around 10% of the portfolio. I would certainly relish the opportunity to find stocks that would allow me to reduce that position but our overall market outlook is not the rosiest. The other risk control measures are part of our investment process. We have regularly scheduled meetings of all of the managers / analysts involved with the portfolios. Every stock is reviewed on a regular basis and we’re very aware of what stocks are doing well, what the issues are in the portfolio at present, and we review those very diligently. Q: Since you are always looking at future growth, which can be quite uncertain, how do you arrive at the reasonable understanding of growth? A: That’s a very good question. One of the ways is to go back and look at the actual sources of company growth and the actual growth of the market they are serving. We look at whether their consumers are likely to utilize more of the product, if the product can exceed the growth of the overall market. Also, there can be growth in the price but my preference is for unit growth as opposed to pricing growth. Gentex would be a good example of that growth. The overall motor vehicle market grows really slowly, but Gentex has a product that’s unique, innovative, and providing significant safety benefits. And because the start from a low base, they’ve got penetration of the overall market. They’ve now sold their products to most, if not all, major auto manufacturers and they are on a large number of vehicle platforms. Their product used to be an option but now it’s becoming standard equipment in many models. As they expand and put more features on their product, there’s higher value content. By expanding to the outside mirrors, now they’ve got three mirrors per car instead of one mirror per car. Those are some of the growth dynamics that we like to see. But it’s relatively easy to see that with a one-product company, while it’s much more difficult with the companies that have an entire stable of product lines.