Q:  What is the history of the fund? A : The Virtus Emerging Markets Opportunities Fund, which was started in 1999, has been subadvised by Vontobel Asset Management since 2006. Vontobel Asset Management is a wholly-owned subsidiary of Switzerland-based Vontobel Bank, which provides private banking, asset management, and investment banking services. The company manages about $8.5 billion of assets, as of July 31, 2010, of which $3 billion is invested in emerging markets and the rest largely in international developed markets. Q:  What countries are investible in the fund? A : We follow the list of countries included in the MSCI Emerging Markets Index. Emerging market countries generally include every nation in the world except the U.S., Canada, Japan, Australia, New Zealand, and most nations located in Western Europe. We do have some exposure to companies that are domiciled in the developed markets, but they generate more than 50% of their profits from emerging markets. Q:  What is the investment objective in the fund? A : The fund seeks to invest in companies that benefit from the domestic economies of their core markets – companies that are growing with the rising middle class in these nations and benefitting from their increasing disposable income and associated purchasing power. Our objective is to find the leaders in various countries that are benefitting from the demographic, technological, and infrastructure developments and the rising consumerism in these nations. We view investments from the long-term perspective and measure the success of our investment picks over a full market cycle, which includes the up and down phases. Our investment objective is to capture as much of the up cycle and avoid as much of the down cycle as possible, with the view of protecting the principal. Q:  How do you proceed to achieve this objective? A : We believe that the best way to achieve capital appreciation and outperform the market over time is by investing in businesses that are well-managed with consistent operating histories. In addition, most of these businesses generate free cash flow that is predictable and growing. We are generally interested in looking at market leaders that have pricing power and financial capital to develop new products and industries. Q:  How do you view companies based in the region but operating in global markets? A : We generally do not consider such companies as investible in this fund. We do not normally favor steel companies, commodities, chemical companies or technology companies that are selling to customers in developed markets. In our view, these companies are operating from the low cost region of the world and, other than that, they are subject to the low growth markets of the developed nations. These kinds of business models and growth characteristics are not attractive to our investment process. Q:  How do you look at outsourcing companies from India? Are they not global corporations with most of the revenues in the developed countries? A : Even though we do not have much exposure in that area, we feel that what outsourcing companies in India do is mundane and maintenance work. This kind of work does bring efficiency to large companies based in the U.S. and Europe and is so low on the value chain for them that this work is the last thing to be turned off in a local economic slowdown. In that respect they are different. When you are buying Taiwanese or South Korean tech companies, you are not buying growth stories of emerging economies at all. Instead, you are buying low cost efficient operators that are relying on the growth in developed markets. So, we look at those names that have a good track record, good corporate governance, and have sustainable high return on equity. Q:  What is your research process? A : The investment approach is a combination of qualitative and quantitative analysis. We start with around 2,000 names and from this list we screen for names with quality and growth. That leaves us with around 200 names. We are more focused on the quality of the company and prefer those that are growing at stable rates and have double digit return on equity and little financial leverage on the balance sheet. We believe that quality companies or market leaders in these nations have the capital to invest and yet withstand the down cycles that are so prevalent and sudden in these markets. Our team of 12 people based in New York and Hong Kong evaluates various business opportunities and looks at one company at a time. We like to meet management, suppliers, previous employees, and competitors to develop a broad view of the company and the industry. We also pay close attention to the financials and cash flows. The statement analysis gives us the return on capital and insight on the efficiency of management. When we analyze past results, we look to see whether the franchise is dependable and the business model is durable. We look at the pricing power of the franchise and also stability of margins. We also look for the business model durability to continue in the future and opportunities for margin expansion. If we cannot form a view about the future of the business, we drop the company from our list. Our analysis leads us to an understanding of the cash flow and earnings power of the company; we look to purchase a stock at a 25% discount to our estimate of its intrinsic value. Q:  Can you give a few examples that meet your investment criteria? A : We have 20% of the portfolio in companies based in Brazil. In the index, almost 80% is in three industries, namely energy, basic materials, and banking. Only 2% out of our 20% Brazilian exposure is in banking, and the other 18% is in other areas, therefore we are very much unlike the index. Souza Cruz, the largest tobacco company in Brazil, sells at 12 times earnings and pays a 7% dividend. Being the dominant tobacco producer earns the company stable income and stable and predictable cash flow. The company’s local business franchise is solid and management is focused on shareholder returns. In India, HDFC Bank Ltd and Nestle India Ltd meet our criteria. As the middle class develops in India, families are looking for credit to acquire new homes or purchase a motorcycle or a vehicle. The fast developing real estate markets in the eight largest metros offer a good opportunity to expand credit to the middle class. Nestle India has been in India for several decades and is benefiting from dual income families and the growing middle class. The rising disposable income and rapid urbanization in India has steadily increased the demand for consumer and food products. Q:  How do you control over-representation in a country or sector in the fund? A : Even though we are benchmark agnostic, we try not to overweight any country by 20% versus the index weight. The same is true for sectors. We can definitely underweight a sector or country and go as low as zero. For example, in Taiwan, we have only one name. We are comfortable with not owning names in a country if they do not meet our investment criteria. We would rather underperform the benchmark than lose money in the fund. Q:  How many names are there in the portfolio? A : We believe in building a concentrated, high conviction portfolio and so we have between 60 and 75 names in the portfolio. Q:  How do you view risk and what kind of measures do you take to control it? A : We take a more absolute approach to risk management. The permanent loss of capital is the number one risk that we are focused on. Essentially, investing in emerging markets involves additional risks that are economic, political and market related. Investor sentiment runs hot and cold and can change abruptly in the region. Many of these nations are only now focusing on corporate governance and still rely on flows of foreign funds for their economic growth, which can change rapidly. Our performance can also be impacted by the success or decline in the few sectors in which we are generally exposed. We invest in one company at a time, but the best picks can also have volatility. We manage political, economic and market risk by not investing in such countries where we perceive higher risks. We not only pay attention to the company performance, but accounting treatment of various items, such as revenues, depreciation and research and development. If we find aggressive accounting policies, even though the business metrics are favorable, we will sell the stock or not invest in the company. We do hedge currency from time to time to try and limit the downside.