Q: How does this large-cap fund differ from others? A: Oak Ridge Investments is an institutional style growth manager. Since our inception in 1989, we have employed the same “intelligent growth” investment strategy, a process by which we look for companies that grow their earnings consistently over time. We believe earnings matter in the long run. We’re not as interested in companies that do very well in the short run. We’re seeking companies that do the right things, such as long-range strategic acquisitions that are far-sighted and which can have a positive long-term effect on earnings. That’s our definition of “intelligent growth.” What separates Oak Ridge is that we look for visible earnings growth, and we want to see valuations that are ultimately attractive. We are a growth-at-a-reasonable price manager. And what’s helped us in the long run is that we’ve stuck with good companies, we do strong fundamental research, we understand our companies, and we stay fully invested. It seems very simple, but the strength of our track record is really a testament to the consistency with which we apply that approach. Q: What are the advantages of using this approach? A: Everything we do centers on earnings and understanding the quality aspects of the earnings. We try to find companies whose balance sheets line up with the fundamentals and that have sound business momentum. A company that has good earnings but a cash flow that doesn’t grow consistently with those earnings is usually a sign of trouble. We believe that if you follow earnings, you’ll always get into the areas that provide the best long-term results. We want to see highly committed management, so that their incentives—even compensation without stock—are tied to what we think is in the best long-term interest of shareholders. In other words, incentives should ultimately be tied to profits. We think this is the best way to invest in the large-cap market. Q: Tell me a bit more about your investment process. A: We are looking to invest in about 35 to 45 large-cap companies mostly from the Russell 1000 index that we believe can outperform the index and the market. While we employ quantitative analysis, we stress strong fundamental analysis. We remain broadly diversified. We typically buy a new position with a 2.5% portfolio weighting. We want to make sure that good stock picks make a difference, but we do not want to be so leveraged that one bad pick destroys the performance. We typically have 40 stocks in the portfolio. Many academic studies show that you need only 15 stocks to get adequate diversification. We look for companies that have strong earnings growth over a 5-year cycle at a rate in excess of the market. As long as you do not pay a significant premium to the market, you are likely to do better than the market. We are forward-looking and growth-oriented. Our research team is focused on the analysis of historical trends. We calculate the earnings based on forward-looking expectations and prefer earnings already turning upward than anticipating the start of a new trend. We look at operating earnings. We also look at why changes in earnings have occurred. We look at quantitative screens and then we move into the fundamentals. Accounting issues may be relevant for an industry—vary from industry to industry, for example acceptable debt levels, revenue recognition, inventory levels and receivables. We are also benchmark aware—we may underweight or overweight the portfolio relative to the benchmark. For instance, when tech stocks made up of 40% in early 2000 of the Russell benchmark, we had a 23% exposure in our portfolio. We felt the NASDAQ bubble made the sector a terrible risk/reward option, but felt compelled to have some exposure to be considered a growth manager. Q: How do you implement this strategy? A: We start with the consensus earnings. We look at a stock’s PEG ratios and compare it to the market and related sector PEG ratios. With regard to earnings, we look case by case. For example, eBay is a high PE stock, but we believe it is a category killer and a super cycle type of stock. We think the company can grow its earnings at 24%. So if it can grow earnings at this rate in six years, the earnings will quadruple, and if the share price stays flat then the PE will go down from 60 to 15. Yes, at that time the company will be mature and the earnings growth will not be 25%-30%, but the PE should still exceed 25. If that turns out to be the case, then you can expect a return of 10-15% on your investment and that should beat the market, given that we expect the market to return less than 8% a year. That’s how we approach the market. We also own Qualcom and Interactive Corp, both of which have the reputation of category killers, but could face increasing competition. We’d rather not be blindsided and look for developments that are company, market, or industry-specific to anticipate detrimental changes. Q: Large-cap stocks are not immune to the broad economic cycles. What are your views on the business cycle and how do you position the fund for the upcoming cycles? A: Different sectors have super cycles and some sectors have only traditional cycles. The tech sector just went through a super cycle and I believe that the steel sector missed several cycles and has been consistently down. Clearly you have to be aware of the cycles but you have to break it down by sub-sector and individual stocks. It’s easier to determine a market cycle in the healthcare sector because they tend to have an extended cycle. Technology stocks can have exceptional growth but it can be of shorter duration. Cyclical stocks can hurt you if you try to buy the stocks when the earnings come in. Typically, these stocks rise before the earnings come in and by the time it becomes apparent, you are investing at the end of the run. So our approach is to watch for sustainable earnings visibility and to underweight cyclical stocks. In our portfolio, turnover is less than 30%. Q: Large cap companies typically derive their earnings from several countries and in different currencies. Recent weakness in the dollar has inflated revenue and earnings of many companies. As a fund manager, how do you view these developments? A: The affect of a weaker dollar has to be viewed individually. We look for sustainable earnings growth. Large-cap companies have a tendency to buy back stock and cut costs to improve earnings, but these are manufactured earnings and not organic. We prefer to buy companies that have higher product sales, preferably from unit growth, and can sustain or grow margins. Q: Many investors were led to believe that energy and oil prices would settle to a lower level after the Iraq war. Reality has turned out to be more difficult than expectations. How does the higher energy prices impact the earnings in the year 2004? A: Our portfolio contains oil exploration companies, but has not been materially affected by the rise in the price of oil. Energy stocks in our portfolio have benefited from the current rise in prices. And, while energy prices overall have increased, the inflation rate is still moderate and so the earnings of the companies that we have invested in remain unhurt. In the longer-term, higher energy prices will have a negative impact on the economy in general. Q: Can we discuss some of your holdings and how they got in your portfolio? International Game Technology Inc is our top holding. State and municipal budgets continue to weaken and, as a result, legislatures have been supportive of legalized gambling. Gambling is a reality in our society—people enjoy gambling and the industry remains in a growth phase with a favorable earnings outlook over the next two years. We still believe pharmaceutical companies will sustain growth trends, and biotechnology companies are likely to continue to benefit because the risk/reward ratio remains in their favor. We own Zimmer Holdings Inc., which produces orthopedic reconstructive implants. Demographics favor this market. On the other hand, we don’t have constructive views on medical facilities operators, as we think the stocks of these companies are vulnerable to legislative changes. We would rather own companies that are innovating and are likely to be rewarded for their innovation. On a thematic basis, we believe that growth in the Hispanic segment remains solid. In light of this trend, we hold companies such as Univision Communications and Banco Popular in our portfolio. Q: Where do you see interest rates heading and how do you take advantage of this trend? A: We believe interest rates are going higher, but it’s not clear when. In an improving economy, interest rates may rise, but stock markets and business conditions are also likely to improve. We own Citigroup because we believe it is not a cyclical stock and, even when rates go up, the company is in a position to outperform the market. We also believe that the price to earnings ratio of this stock will expand and an aggressive dividend increase is a prudent use of growing cash flows. Q: Almost all the recent fraud has been in the large-cap sector. How do you avoid this? A: When stocks in the news—such as Enron, MCI Worldcom and Tyco—started underperforming the market, we were concerned and, sold these positions for a profit. Our sell discipline ensures that when a stock’s relative strength starts weakening we re-examine the story. While our portfolio turnover is generally low, when we don’t understand why a stock is weakening and when cash flow doesn’t match up with earnings, we generally sell the stock. We believe unresolved issues remain, such as pension liabilities with older companies and stock options expenses with newer companies. We keep abreast of what is going on in the marketplace and watch these issues closely. Q: Why do you have Microsoft in your portfolio when the stock and the company’s earnings have not improved in the last two years? A: The stock is in the portfolio because it represents 4% of the Russell 1000 Growth Index—a significant weighting. In fact, we underweight the stock with a 2.5% holding. We also believe that once the company resolves legislative issues and new products are launched there will be a special dividend and a resumption of earnings growth. We distinguish ourselves from other growth funds in that we would like Microsoft to declare a special dividend. Q: How does the recent acquisition of your fund by Pioneer Investments help you? A: The Pioneer acquisition helps us with the fund’s distribution. We just hit our 5th anniversary and we managed $9 million in assets in this fund, an insignificant percentage of Oak Ridge’s $1.5 billion of assets under management. We believe that with Pioneer as a partner we can grow a larger base of assets, which would be to the benefit of all fund shareholders. We are very excited about working together with Pioneer to grow the fund. {{We look for companies that have strong earnings growth over a 5-year cycle at a rate in excess of the market. As long as you do not pay a significant premium to the market, you are likely to do better than the market.}} Bio: David M. Klaskin: Chairman & Chief Investment Officer Oak Ridge Investments, LLC Co-Founder of Oak Ridge Investments in 1989, Mr. Klaskin leads the firm and its investment team. He has developed and implemented the investment discipline that is applied across all Oak Ridge products. He is co-portfolio manager of the Oak Ridge small/mid capitalization and large capitalization equity products. Additionally, he is portfolio manager of the firm’s mutual funds: the Oak Ridge Small Cap Equity Fund and the Oak Ridge Large Cap Equity Fund. Mr. Klaskin also chairs the firm’s Executive Committee, its Investment Committee and its equity selection team. He has been featured on television, radio, and in numerous publications. Prior to establishing Oak Ridge, Mr. Klaskin worked as an investment executive at Shearson Lehman Hutton for eight years. Mr. Klaskin is a native of Chicago and graduated from Indiana University with a Bachelor of Science degree in Finance.