Q:  What is the history of PineBridge Investments? A : PineBridge Investments, founded in 1996 and headquartered in New York, is an independent asset manager with approximately $69.5 billion in assets. We manage investments in equities, fixed-income securities, and alternative assets, including hedge funds and real estate. The PineBridge U.S. Small Cap Growth Fund was formed on September 8, 1999. I am the lead portfolio manager of the fund and also manage the PineBridge U.S. Micro Cap Growth Fund. Q:  What core beliefs drive your investment philosophy? A : Our philosophy is that over time neither growth investing nor value investing dominates the other in terms of returns. We believe that by categorizing companies according to their stage of development and analyzing and valuing them accordingly, we can deliver consistent returns for our shareholders. In small cap, we believe the market is very inefficient and our goal is to identify earnings growth in smaller companies before it is reflected in the stock price. Q:  What is your investment strategy? A : We invest at least 80% of assets in stocks of U.S. small cap companies that at the time of purchase have a market cap between $200 million and $2.5 billion; or within the range of companies represented in the Russell 2000 Growth Index. We categorize companies in four groups that we look at in terms of their stage of development, such as Exceptional Growth, High Stable Growth, High Cyclical Growth and Mature Companies. Exceptional growth companies are companies that are very early in their stage of development but address a large and fast growing market that they can exploit over time. High stable growth companies tend to have steadier growth rates. These are companies that generally have recurring or transactional base revenue and are easier to predict. High cyclical growth companies have more cyclicality and variability in their earnings streams. The fourth one is made up of a few different groups that include pure cyclicals, defensive stocks and turnarounds. Typically, because this market cap range offers more opportunities for growth, we rarely invest what we deem pure cyclicals. We occasionally invest in turnaround situations at companies that were once favored by investors but may have fallen off their growth track because of market or execution issues. We carefully review the earnings expectations of investors and what is the margin profile of the company. We build our own estimate of the likely margins and earnings in the quarters ahead and establish a target price. If that price is 20% higher than where the stock is trading we may purchase the stock. Next, we evaluate these companies in terms of their business fundamentals and how investors’ expectations are changing. We call this fundamental progress and fundamental revision. When we are reviewing the progress in fundamentals, we are looking at drivers of sales growth, quality of earnings and the sheer viability of the business concept. We are also interested in understanding how large is the addressable market and is the growth trend likely to improve or deteriorate. In short we are looking to separate temporary factors from the permanent factors. In terms of fundamental revision, we are focused on earnings expectations. For example, what is the outlook set by the analysts following the company? We are looking at the trends in revisions and are the earnings accelerating or decelerating. Each category that we are looking at has its own different fundamental revision and fundamental progress drivers within them. Q:  Why do the analysts’ views on the companies matter? A : Our perception is that companies that have disappointed the Wall Street are getting unduly punished, more so in the recent past. We want to make sure companies are able to guide investors conservatively. We like companies that can set expectations at a reasonable level. Over time, we found those companies that can manage investor expectations well and “under promise and over deliver” are rewarded with higher earnings multiple. Q:  What is your research process? A : We get ideas in few different ways. The first, as analysts we are divided up by sector coverage. Our belief is, it is important to know stocks within the sector coverage group, what the sector dynamics are, how the sector trades over time and what is the secular and cyclical outlook for the sector. We do screen for stocks as well. We look for companies based on fundamental metrics that I talked earlier about and try to zone in on companies that display rising trends in earnings and sales and improving margins and beating estimates. Screens are just starting points for us to do more fundamental work and find out more about companies that screen well. Management meetings also are a key for us. We want to get a business framework from the management’s perspective and what they are looking at in terms of the larger risks and opportunities. We also want to make sure that they have a full grasp on the business outlook for the industry that they are in and have a good handle on the competitive environment. We also see companies at conferences or their headquarters as well and occasionally do visit the facilities of the companies. We do talk to competitors as well just to find out and make sure that the underlying competitive environment is in line with where we think it is and where management thinks it is. Q:  What are the drivers for fundamental progress and fundamental revision? A : There are many drivers of fundamental progress for companies including things like new product introductions, price increases, market share gains, cyclical upturns in the underlying market, etc. Fundamental revisions are confirmation of the fundamental progress drivers where Street estimates are increasing because of success in the fundamental progress. Q:  What is your buy-and-sell discipline? A : The buy discipline goes back our four sector categorization that I mentioned earlier. Ultimately, we look at the fundamental progress drivers, potential for positive revisions and valuation parameters that we have set up for each individual category. We may consider buying a stock if it is trading below its fair valuation estimate. When a stock reaches its target price and there is no longer any upside to the stock, we sell the stock. If there has been a change in the fundamental backdrop for why we invested in the stock in the first place, that is an easy sell decision. But we also use what we call our Suspect List. What we do here is look at various fundamental and technical factors to identify stocks that may be at risk of declines. Red flags for our Suspect List are declining earnings estimates, stagnant stocks, or stocks breaking long-term trendlines or moving averages on significant volume. If a stock has two of these red flags for two months in a row, it is a sold. Q:  Can you give some examples to better illustrate your research process? A : For example, we reviewed one of the specialty contractors that provide services to cable and telecom companies. This firm is a specialty contractor and their legacy base has been to serve the cable, satellite and telecom companies. They do a lot of Direct TV installations. We liked the stock for the following reasons. Back in late 1990s, when telcos were building out their networks and laying a lot of fiber, this company was a key beneficiary. They had a lot of revenue tied to two or three large customers like AT&T and DirecTV. However, over the past few years, the company made several acquisitions that got them in a lot of new areas like electric utilities and energy companies. These acquisitions had gotten to be fairly sizeable, about 50% of revenue for the company as they integrated the acquisitions over the past few years. We got much more excited about this company after witnessing a cyclical upturn in their end markets like power and telecom. We believed that ultimately the stock had an earnings multiple expansion opportunity because it was valued at such a discount to its peer group. So, we took a position in the company. It turned out they did start to see improvement where the utility and telecom spending was improving. They started getting new business and existing accounts added to their backlog pretty substantially giving them a lot more visibility. We saw revenue growth accelerating and EBITDA margins which had been running in the range of 8% to 9% expanded up to 11% and 12%. Q:  Any other example? A : It is a large ATM terminal and network operator mainly in the U.S. but also having assets in the UK and Mexico. I originally saw this company in late 2009. It is a fairly stable and predictable steady growth type of business. Another factor for investing in this stock was that even in a bad economy, people still go the ATM and withdraw cash. Moreover, they had been buying a bunch of different ATM networks and integrating them. I was attracted to the consistent nature of the business and the stock was trading at a fair valuation. The company enjoyed strong pricing power (generally, this company charges $2 to $3 per transaction whereas a lot of their competitors charge as much as $5) and margins. It is a nice fixed cost business and as more people use the network most of the revenues go to the bottom line. They also had a few balance sheet catalysts that were very attractive -- the company refinanced their debt to lower their interest expense which was nicely accretive to earnings. In the first-half of 2009, they had experienced less than normal growth because the economy was so bad but this had started to improve in late 2009. The growth rate had started to accelerate. In addition to this, we found a great entry point opportunity in 2010 as there was some noise around mandating lower ATM surcharge fees in the financial reform bills which ultimately never passed. And so, we did take a position in the company and saw that the revenue growth accelerated in the first-half of 2010 from basically the mid single-digit growth up to the low double-digit in the first quarter, EBITDA margins expanded from 22% to mid-20s. Analysts revised their earnings estimates throughout 2010 and they continue to get revised higher as the fundamental progress drivers remain positive. The strongest driver we see going forward is the increased use of general purpose reloadable cards by the unbanked population which is bringing ATM transaction possibilities to a much larger population. The rising earnings has only attracted more analysts to the company and that has expanded envelop of the interested investors. And the earnings multiple has been expanding too. Q:  How do you build your portfolio? A : We typically hold between 40 and 60 names. We have maximum limits on position sizes of 5% and sector weights of 30%. Ultimately, if we do find more attractive investments opportunities in certain sectors, we are not afraid to make overweights in sectors up to our 30% cap. We are fully diversified across all sectors and want to get the best ideas in the portfolio that we think have the most upside. Our benchmark is the Russell 2000 Growth Index. Q:  What kind of risks do you focus on and how do you manage them? A : We focus on a few different risks. Liquidity within small caps is a key risk that we monitor. We don’t want to own more than seven days of trading volume of any stock. In case we are wrong, we make sure we can get out easily. Second, we do stay fully invested at all times and ultimately want to stay in the stocks that we think have the best fundamentals and hold upside potential. The fundamental risk within the companies is assessed by doing good due diligence. Ultimately our initial research to look for companies that have superior business model also acts as a risk control. In addition, we are also mindful of the price we pay. Our margin of safety of 20% when we purchase stock also helps us from the downside protection. We want to make sure that we will be rewarded for the risks we are taking.