Q:  What’s your investment philosophy? A: We look at four areas where the internet is having the most impact on the evolution of certain industries - media, commerce, infrastructure and communications. Within each of those areas we try to identify the best investment opportunities that should benefit from the internet, either acting as a catalyst, or as an additional avenue for these industries to develop. Q:  What differentiates you from your peers? A: We focus primarily on the internet-related advances in technology but the biggest differentiator between us and our peers is the way we structure our portfolio. We have roughly a 50/50 mix between growth and value stocks and for each of those investments we have different criteria we look at. Most technology-oriented managers are strictly growth-focused. There are a lot of good growth opportunities within our sector but they tend to be high risk. There are interesting opportunities in the value side that may not be as linear as the kinds of returns you can hope for in the growth side but they are still opportunities for returns. From a portfolio standpoint, it gives us added downside protection and diversification, to help our returns over the long term. Q:  What are the criteria you look at on both the growth side and the value side? A: On the growth side, we look at more qualitative factors. We look at companies that are addressing large markets, companies that have the opportunity to gain market share within those markets, companies that can achieve a barrier to entry in their business. And then companies that have good management teams with experience in the area they are operating in. Finally, we are looking for companies that are trading at reasonable valuations relative to their growth. On the value side, we are looking at quantitative factors. We look at companies that have a high amount of cash on their balance sheet, relative to their market capitalization; companies that trade at low Price to Sales ratios and companies that have a unique technology or service. If we find a quality company that is going through a difficult period for some reason such as restructuring or reorganization, if the company’s product or service is unique and does have intrinsic value, then they are either going to be able to right size that business, be able to achieve better margins, and therefore earnings, or they won’t be able to be successful in their reorganization. Then, at that point, they will probably be a candidate for an acquisition. Q:  How is your research process organized? A: We do both primary and secondary research. We do our own evaluations, we attend industry conferences, we meet companies and we also rely on Wall Street research and other third party research services. Then, we evaluate every company as they report results. We constantly set internal price targets and then adjust our positions accordingly. Q:  How do you generate your ideas? A: Ideas can come from different places. It could be evaluating a current holding and hearing more about a new company, or it could be at an industry conference. Nine out of ten ideas may not be that interesting, and then one out of ten may be something that we’ll do some more research on. Then, if we like the company, it depends on whether or not it’s a growth or a value situation. The bar for us to invest in a value situation is much lower, because most of the expectations are out of the stock. These are companies that are trading at very low valuations, where we have limited downsides. So if things don’t work out, our downside is relatively limited. Q:  Could you give one or two examples? A: One name we added on the value side is InfoSpace. They have two interesting businesses - a mobile platform business, which is going through tough times right now, and a small search and directory business that is a good cash generator. On the mobile side, last summer they lost a big contract with Verizon. The stock plummeted 30% and InfoSpace got to a point where it was trading at a market cap of $600 million, but it had about $400 million in cash in their balance sheet and no debt. They had to make some changes in the mobile business, but the search and directory business was fine, so we made it one of our top positions, and the stock recovered. Most investors in our sector tend to be short-term oriented. Luckily, we knew it was an overreaction and our downside was very limited. In the meantime, the company has done a decent job trying to cut some costs and they just announced a big special dividend of $6 a share. On the growth side, things tend to be more linear as long as the company is doing well and their fundamentals are strong. The value holdings tend to be a little more unpredictable, but in a market decline those value holdings tend to hold up better. Q:  How do you protect yourself from the industry changes that might occur? A: We tend to be price focused, so, when we do our internal price targets, if a company is close to what we think is fair value, we’ll cut back the position considerably. And if we feel a company has been oversold, that will determine the position size. Valuation tends to dictate that more than anything else. That’s why our top holdings change. We are in a volatile sector, so, these stocks can go from undervalued to overvalued to undervalued, all within a quarter. We also look at barriers to entry. Q:  You mentioned that four areas where the Internet is having the most impact - media, commerce, infrastructure and communications. Do you see different characteristics in how internet is touching in these areas? A: There isn’t a lot of activity on the commerce side, but that’s one of the areas where the traditional companies have done a very good job in creating an online presence, much better than the traditional media companies. On the media side, there are a handful of companies consolidating a lot of power. On the commerce side, the market is becoming more fragmented and specialized. One of the biggest success stories on the ecommerce side, Amazon, has had a very difficult time generating sustainable margins, because the traditional players are competing strongly. We have been heavier weighted in the media side in our investments, and out of the four areas we have been heavier weighted in media and infrastructure, and probably lighter weighted in commerce and communications. But we don’t underestimate those areas. Q:  A shift is going on with IAC/InteractiveCorp owing Ask.com. They are having difficulty gaining market share against Google, but they still keep trying. At the same time, Dow Jones has the best content, but they are not able to leverage their content on the internet in the revenue side. How do you leverage these situations? A: We actually owned Market Watch that was acquired by Dow Jones. On the print side, I’ve been surprised to see companies like The New York Times buying About.com, Scripps buying Shopzilla but they understand that it’s adapt or die, so they are all making the effort. One of our holdings is NewsCorp. They have been very aggressive in internet acquisitions over the last couple of years, and when they acquired MySpace, they really became a player and they own other internet properties. People sometimes are surprised we own NewsCorp, but we think it’s a very reasonable investment with a lot of upside and a lot of that upside is clearly internetrelated. Q:  Do you invest within the U.S. or you also look for opportunities outside the U.S.? A: Both. We invest up to 25% of the fund’s assets outside the U.S. Right now it’s a bit under 20% and a vast majority of that are in Chinese companies. A lot of them were listed between 1999 and 2001. And then they just languished. In the last couple of years, their advertising businesses, actually first the wireless businesses, perked up. Then, in the last year or two, the advertising business has really picked up. Advertising businesses are growing around 40% year over year. What is interesting about the Chinese companies, obviously, is that it really is a broader player on the Chinese economy, which is growing at double digits. Internet is gaining share, so is advertising. One of the reasons why we are inclined to increase our positions in China is that there is going to be a lot of spending in anticipation of next year’s Olympics in Beijing and there is a lot more advertiser activity that is going to be picking up later this year and early in the next year. Q:  How many stocks do you have in the portfolio? How do you build your positions? A: We generally own somewhere between 40 and 50 positions. The position sizes range from very small to roughly 5.5%. Q:  Do you measure yourself against any benchmarks? A: Ultimately we look at the NASDAQ, but we break it down. We look at seven other Internet indices, just because each of them tends to be a little quirky. I’ll use an average of the seven, just to give us an idea of where we stand. The NASDAQ is really the benchmark we are going to be judged against. Within the internet related technology investments, we look at this basket of very small indices, to give us an idea of where we stand. Q:  What is the turnover in the portfolio? A: The turnover, historically, has been very high. One of the mistakes we made back in the late 1990s, is that our turnover was too low. We were just not inclined to let positions ride to do that. I’d like to trade more, not less. I’d like to take profits a little more aggressively, and cut losses. Right now our turnover is probably between 120% and 150%, annually. But we have had some years where our turnover has been over 1,000%. You do have a choice. You can just say you like the company and you would let it ride through any volatility. Or you can say it is dangerous and it’s not really necessary. You are a steward of the portfolio. We are not managing the portfolio on a week-to-week basis for returns. But we are not going to be oblivious if we think a company is way above where we think fair value is, we are going to cut back the position. We won’t let a top position get to be 10% or 12% of the fund though many managers are willing to do that. In our opinion, no matter how much you like a company, or no matter how much you like the valuation, once you let a position size get into the double digits, I think you are taking undue risk. Q:  What other kinds of risks do you monitor and what do you do to mitigate them? A: We look at the macro risks in terms of the general economy. If the economy slows down and we go into a mild recession, that is going to affect advertising or consumer spending. But we try not to manage the portfolio based on general macroeconomic forecasts, because they are very unpredictable. On a portfolio basis we manage risk by having that value and growth component. We are not inclined to make market calls. We don’t want our opinions on the market to influence the performance of the portfolio. We’d be more inclined to look at things in sector orientation, and a more company-specific orientation. We handle the overall portfolio risk by keeping position sizes in check, and keeping that diversification between growth and value.