Q:  What is the history of the company and the fund? A : The London Company has been managing money since 1994 and we have managed Touchstone’s Small Cap Core Fund since September 2009. We were selected as the sole sub-advisor to manage Touchstone’s Mid Cap Fund in December 2011. We believe in selecting one stock at a time in our fund and also like to have concentrated holdings. We are prepared to put higher allocation to our best ideas, preferring to hold fewer than 35 names and not dilute our holdings across 100. Q:  What is your investment philosophy? A : The key to our philosophy is making sure we avoid large mistakes. Our investment process is focused on downside protection because we believe in the long run you can add value if you can avoid significant drawdown. We look at stocks as a credit analyst would and put no faith or emphasis on future growth. We focus strictly on the balance sheet and try to find ways to create value there. We typically hold between 30 and 40 names and our top ten could be as much as 50% of the portfolio. We also believe that in order to beat any benchmark you have to be different from that benchmark. We focus on past business performance and current market fundamentals. We focus on facts rather than estimates, so if the company misses earnings or revenue growth our downside is limited and protected. We look at the company as a business owner would look at it, looking at the balance sheet and determining how the restructuring of capital could add value, just as a private equity holder would do. We do not assume the company is going to grow in the future so if there is speculation that the company is going to grow 15% in the next five years, we are going to use growth rate between zero and three. We do that because we want to make sure that if we are long we are not going to get hurt in any one stock. Over time, markets tend to reflect debt free recap or spin off of hidden assets and this way of thinking also provides us additional downside protection because companies do have physical assets and that acts as a value anchor. Q:  It sounds like you invest as a private equity investor would? What is your investment strategy? A : We focus on who the top performers are in any given year. If you play a good defense and make sure you do not have names in the portfolio that are down 30% or 40% then the portfolio will take care of itself. That has been our strategy all along and it follows how a private equity owner or a private business owner would look at it. We look at things that are management controlled, and could be done tomorrow to create value, versus trying to outguess the other thousand analysts on what their projected growth rate is going to be next quarter or for the next five years. That part of the marketplace is highly efficient so it takes patience. It can be three or four years before it happens. We gravitate towards companies that have high returns on capital because that is a much more stable metric to consider. The companies that historically have high returns on capital will usually continue on that trajectory. Typically we look at companies that are oligopolies. They have only a few competitors, are more mature and very stable. They dominate their market and have pricing flexibility, high operating margins, and high returns on capital. Once we find a company with acceptable cash flow, we determine how we can optimize the balance sheet to discount that capital back at the lowest cost. We try to take speculation out of it as much as we can and look at it as if we control the company. We ask what we can do absent of any future forecasts, to increase the value for shareholders We do not look at the traditional metrics like multiples on earnings, sales and other valuation metrics, but at the entire company including balance sheet, income statement and cash flow characteristics. We always try and look at what companies are doing versus what they are saying. We take a cynical view of what they are telling the street because of course they are going to give you the best pitch. Probably three quarters of the companies out there have no net debt on the balance sheet and if you are a decent company with a good business model that is reasonably profitable, then you should be able to entertain 30% debt structure. This is especially today when you can borrow at record low rates. If your equity is trading at five-times cash flow, , that translates to a 25 multiple on earnings. Why would you not borrow money at 3% or 4% and buy back your stock all day long? We want companies that have such high margins and cash flow that they are still investment grade. I am not talking about levering it up to seven times operating earnings before interest and depreciation. We are just restructuring the balance sheet to a normal debt-to-cap ratio where the interest coverage is still high but not to the point it puts them in trouble. Q:  What kind of companies do you look at? A : We look at companies that we believe are stable, dominant in their marketplace and have high margins. We do not want to get into a situation where downturns will put them in trouble. In an ideal world, we like to have a company that is trading at three times cash flow and has annual return on capital of 55%. We prefer a stable and predictable business with no competitors whose management team is buying back shares regularly and returning 100% of free cash to shareholders through dividends or buybacks. The one thing that is consistent with all of our products is that through any rolling five-year period our downside protection has always been good. We believe we are playing a good defense and avoiding portfolio holdings that will hurt the performance. We focus on that part of it and do not worry about who is going to be the next winner in the portfolio. Over a five-year period we are going to outperform by not losing materially on the downside. We screen the top decile companies for a few factors: high return on capital in the mid cap universe, trading at stable valuation primaries in terms of enterprise-value-to-cash-flow, and enterprise-value-to-earnings-before-interest. We focus on 250 names that fall in our universe. After that it is just a matter of going through qualitative features and looking at the balance sheet, the management team and change in amendments. Are they buying stock or selling stock? We like to rely on independent analysts and not just Wall Street analysts, who can be more objective. Q:  What is your research process and how do you look for opportunities? A : One example is Cabela’s Inc., which is a hunting and sporting goods retailer. When we first bought this stock years ago it was trading at about book value. The catalogue business was eroding but they still had fairly high returns in their stores. They brought in Thomas L. Millner as President and CEO from the outside and he was focused on increasing returns on capital, increasing margins, changing delivery format to more of a bricks and mortar destination store. Slowly margins started increasing, the return on capital was improving, the incentives were right. We bought Cabela’s stock at a deep, depressed price and the company’s margins and top-line has been growing at a double-digit pace since the transformation. Then we also noticed one of the older directors, a non-Cabela family member, was buying stock in the open market, which we pay attention to, and he kept on buying until the stock reached the mid-60s. Another example is NewMarket Corporation, which is a competitor of Lubrizol. There are three or four major players in the supply of additives and the lubricants for cars and fuel and they are all rational competitors. Their return on capital is in the 25% - 30% range. They are dominating the category and had pricing flexibility. Basically, their demand is driven by the increase in mileage driven, so they are benefiting from the emerging markets in Latin America. It is not an industry that is growing fast on a unit-buying basis but they are able to get increased margins through price increases. It is a family owned company, or at least the family is still involved in the company. They have done a good job of returning capital to shareholders through increased dividends, special dividends, and buybacks. They have reduced their share count from 17.5 million shares down to about 13.3 million in the last five years. Typically when we are buying a stock, the company and the stock are out of favor for some reason or another. We hope to benefit from the earnings growth and improving perception in the investment community that lifts price multiple. But when we buy at the bottom, our downside is limited and protected. Q:  What drives your sell decisions? Do you establish price target at the time of purchase? A : Our price targets are dynamic, they are changing, and they are not static, so hopefully the price target is moving up. The earnings and the cash flow have to move up with it. As long as we are not uncomfortable with the multiples, which would usually be somewhere north of 20, and we feel the company is still trading below its probable market value, we are going to hold it. Usually when we sell a company it is because they take capital and delete shareholder value through some type of expensive acquisition. We would rather see that excess capital shown on the balance sheet returned to shareholders. We will sell if management is not making capital allocation decisions that we favor. It is not because the numbers are wrong. At least nine times out of 10 that is probably the most aggressive reason we sell. Other reasons might be that the valuation becomes less attractive. We have sold some of the REITs because we felt they were getting close to maximum value. Some primary REITs are selling at pre-cap rates. If we see a lot of insider selling going on that makes us nervous and we will want to cut back on that name. Any of those three reasons are the primary sell disciplines. Q:  What is your portfolio construction process? A : We do not get too hung up on sector weights relative to the benchmark. We try to take our 33 best names that we have and let them fall where they fall. We try to avoid allowing that number to exceed 40. We feel that once we are beyond that number we are diluting the portfolio. We always tell our analysts that they must have enough conviction to take at least a 3% - 5% position. Do not come to me and tell me that you want to buy a 1% position if you have high conviction. That is the key; 99% of our competition is buying 100 different names and 1% of everything and at that point you are just diluting your potential to outperform. Russell Midcap Index is our benchmark index against which our performance is measured. Q:  What is your portfolio turnover? A : Our portfolio turnover is fairly low over a five-year timeframe and typically 25% or less. We want to take a 3% position across the board and we let our winners run. If we are still comfortable with the valuation it may grow to a 5% position but we are not necessarily going to cut it back to 3%. With underperformers, if they are going from 3% down to 2.5%, we are not going to automatically add to them. Q:  How do you define and manage risk? A : We do it strictly from a bottom-up perspective. We look at risk from what the permanent downside risk is and try to minimize that by sticking with companies that, in terms of capital, we believe have predictable cash flow, strong competitive positions, a strong balance sheet and a strong management team. We try to avoid being over-exposed in one sector and limit the sector exposure to two times a sector weighting in the index. So if the Financials sector is 20% of the index, we are not going to exceed 40%. We are not going to allow any one position get to exceed 7% - 10% of the portfolio. Q:  How have you changed your investment process since the turbulent market years of 2008/2009? A : We stick with companies that we believe have strong markets and competitive positions that are not going to suffer if we experience another 2008/2009. We are not focused on where the stock quote is on any given day. We are focused on what the true private market value of the company is and try to hone in on a discount to that number. I think 85% of the trading volume on exchanges is driven by speculators with exposure to ETFs, or hedge funds, and by high frequency traders. Fortunately, we do not trade frequently so we do not get too caught up in that but markets in general have become more volatile in the last decade. They are holding positions not for a month, but for a day or sometimes less, so that tends to fluctuate prices quite a bit more than the merits of the business might justify. Extra space Extra space Extra space