Q:  What is the history of the fund? A : Global Currents Investment Management, LLC is a wholly owned subsidiary of Legg Mason Inc. The team at Global Currents, formerly managing client assets at Brandywine Global, transitioned into a new investment affiliate effective from July 1, 2008. Currently, the firm, which is based in Wilmington, Delaware, manages approximately $4.5 billion in assets. Our clients include public funds, corporate funds, endowments, foundations, Taft Hartley, and financial institutions. Q:  What core beliefs guide your investment philosophy? A : Our investment philosophy is grounded in the fact that value stocks have outperformed the market over full market cycles and that a disciplined bottom-up approach allows to capture potential additional return premium. We look at companies that are not just cheap on an absolute basis but cheap relative to their own history. Additionally, we focus on long-term value, not short-term price or earnings forecasts. Q:  How does your philosophy translate into the fund’s investment strategy? A : The fund invests primarily in equity securities of foreign companies and may have small, mid or large market capitalizations. We invest in quality companies trading at low prices relative to their dynamic intrinsic values. In doing so, we diversify our investments across several regions and countries to help reduce risk. We emphasize individual security selection, focusing on capital appreciation potential, although some investments have an income component. In selecting individual companies, we focus on experienced and effective management, research and development track record, product development and marketing, sustained competitive advantage, strong financial conditions and undervalued stock prices. Q:  Would you describe your research process? A : Our universe consists of approximately 12,500 non-U.S. publicly traded securities with a market capitalization greater than $100 million and sufficient liquidity, including developed and emerging countries across all industry sectors. We identify stocks selling below their normal valuation levels and we employ a quantitative model. Then, we compare current valuations in terms of multiples of earnings, book value and cash flow ratios with historic valuations and generate a diversified universe of stocks trading well below their normal valuations. We employ a nine-factor valuation that converts that converts valuation ranges to percentages. We assign each security different valuation scores before we arrive at the overall score, which is the equal-weighted average of the nine metrics. To qualify for further evaluation, securities must have an average score of 50% or higher. At the same time, companies that score less than 50% are instantly excluded from further analysis. We then eliminate stocks with characteristics we associate with poor performance, such as declining quality of financial characteristics, high product risk factors, deteriorating competitive position, discomfort with management, or accelerating industry deterioration. We seek stocks selling below their normal valuation levels and reduce the universe to 1,000 stocks. Next, we eliminate stocks with negative characteristics and barriers to success and the focus list is about 125 stocks. Generally, we evaluate eight to ten new ideas per month. As the next step, we conduct in-depth fundamental analysis on our remaining universe of high quality companies selling below normal valuation levels. The goal of our fundamental analysis is to develop a deep understanding of these businesses in order to identify the key drivers of their valuation and profitability. We focus on uncovering the scope and perceived likelihood of recovery in the longer term, as opposed to developing specific short-term earnings forecasts. We prove from the fundamental standpoint that profitability is depressed or at least not extraordinarily high. From a barriers to success standpoint, companies with declining quality of financial characteristics, deteriorating industry conditions, deteriorating competitive position, and lack of confidence in company management are eliminated from the focus list. We exercise independent research and judgment and identify sources of value like margin of safety, net present value of future cash flows with no or worst-case scenario growth and asset value. Other factors that come into play are dynamic intrinsic value and implied versus expected growth. We buy companies with extremely low implied growth between zero and 3%. Lastly, the sector teams get together in the second week of the month to discuss if there are any new ideas that need to be put through our quality process. Q:  Could you give some examples to highlight your process? A : We own shares of Danisco A/S, a Danish food maker, whose stock was about 220 kroner at the time of the purchase. Danisco decided to sell their sugar business and focus on enzymes, which is a really high-return business. In other words, they were going to focus on high-margin businesses and earn a high-return on equity and get rid of the low return on equity businesses. As soon as they sold their sugar business, the stock fell and was trading below book value. At that moment, it was priced to destroy value, meaning it was priced for less than zero growth and we felt here is a company that is basically going to take its return on equity from 5% or 6% to probably close to the 20% based on a credible business plan. We were driven there by our focus on what was cheap and because we felt that it was a great business with a high return business model. In fact, we were not paying anything for future growth and the growth and returns would be a lot higher. For us, it was good enough to know this very high-quality company was undergoing a massive transformation with a great new management team and was going to dramatically increase its profitability. When we put this stock through our analysis, the stock was trading at 218 kroner and our research estimate suggested a target price of about 800 kroner. That’s a kind of huge margin of safety. The problems in the company had not been fixed but we were able to bet on this risk sooner due to the margin of safety. It allows us to make such aggressive bets on companies with substantial extraordinary upside as we try to limit risk. Another company that we own in the portfolio is Symrise AG, which is in the food ingredients business. The flavors and fragrance businesses massively disappointed investors, the company lost credibility, and as no one believed in them the stock fell 70% from its peak. This is another example of buying a stock that has stumbled but where the basic foundation of their growth did not change. We saw that everything the management and prospectus said was actually true, but they just did not account for some of the rising input costs, the global recession and disruptions among customers based on takeovers. However, what attracted us to this company was that the foundation of the business was quite solid. These two scenarios show how we get to act differently when something happens to a company outside of its control but the basic franchise is still fantastic. Q:  How do you calculate the margin of safety? A : There is a subjective and objective margin of safety. The low level of current profitability and valuations and the low price to book are objective measures of margin of safety. We see the implied growth versus our expected growth as the more subjective part. Q:  How do you execute your portfolio construction?[ A : Our portfolios typically consist of 50 to 90 securities from developed and emerging markets diversified across all sectors and capitalizations. We expect to add value primarily through stock selection. As far as our annual turnover is concerned, it generally ranges from 50% to 70%. Being a fund that invests across all market capitalization, we pursue an active approach to stock and country allocation as we employ an active nvestment style. We seek to maintain opportunistic exposure through varied emerging market equities. The stock selection for our portfolios entails both quantitative and fundamental analysis. Our screening process is designed to identify stocks that we believe are trading below normal valuation with low expectations, while our fundamental research highlights firms that have the catalysts in place to spur a return to normal valuation. We do not build the portfolio on the basis of macroeconomic forecasts, but we do incorporate economic and currency risk analysis into our stock selection. Individual holdings generally range between 1% and 3% of portfolio assets at cost with a maximum of 5% in one stock at market, 15% in one industry, 35% in one sector, 50% in one country, and 15% in emerging markets. We will typically adjust the weighting of our positions based upon upside potential, downside risk, our fundamental conviction, the impact on diversification, and client-directed guidelines. The fund’s primary benchmark is the MSCI EAFE Index. In terms of sell discipline, we will typically review a security for sale if it appreciates to our target price based on the intrinsic business value; if the reward/risk trade-off of a new investment is more favorable than that of the existing holding; or if essential steps toward a successful recovery fail to materialize within a time span of years. Q:  What do you consider as primary sources of risk in the portfolio and how do you contain it? A : First of all, we manage company-specific risk by seeking to buy only those stocks that are at the lower end of their historical valuation ranges and have significant catalysts to spur future growth. Second, we enhance the probability of outperformance of every stock in the portfolio through an adequate level of diversification. We certainly want to avoid any single factor exposures. We also have a risk management team that looks at the portfolio and identifies factors like turnover, tracking error, portfolio concentration, valuation factors, as well as performance issues. Moreover, we do a correlation-based factor exposure risk analysis of the portfolio, trying to limit single factor bets in order to enhance reproducibility and consistency.