Q:  Would you describe your investment philosophy? A:We are a diversified natural resources fund, so we are able to invest not only in energy, but also in basic materials such as industrial metals, paper, chemicals and steel. We are a global fund and we look for opportunities all over the world, the U.S., Australia, Hong Kong, London, anywhere. Our philosophy is based on the idea that there is a long-term bull market for commodities in general. The international economic growth, particularly the growth in emerging markets like China and India, is spurring an industrialization increase worldwide. The industrialization requires consumption of a lot of commodities, which has been under-invested in for the last couple of decades. We believe this cycle will be longer than recent cycles and may continue not just for a couple of years, but well into the next decade. While the previous cycles were fairly short and driven by supply, this one is more demanddriven. Q:  When you look for the value created by the supply/demand imbalance, what is your investment approach? Do you rely on the value, GARP, or growth discipline? A: Often materials and energy fall into the value category, but our approach is different. We look at global economic trends, currencies, supply and demand issues, and then we looking for the biggest opportunities within the sector, which commodities are performing well and which ones will continue to perform well. Then we look for the individual equities that best represent those areas. Q:  Can you explain the broader picture for the various resources? Why should someone, who is not exposed to this sector, consider investing in your fund? A: The energy market is very tight. OPEC’s spare capacity is constantly decreasing from 15 million barrels per day in the 80s to 1.5 million currently. In the case of a supply disruption, the risk premium is much greater and that is reflected in the price for crude oil. On top of that, there is very strong demand worldwide - projected demand growth is 2% for this year on the heels of 3.5% last year. This is a scenario involving strong demand and limited supply in the medium term, bullish view on prices, as evident from the current price of nearly $61. In the fourth quarter, we'll actually be in a deficit, which is discounted by the market with higher oil prices. In the case of metals, particularly copper, the very low inventory levels are supporting prices. In the first half of the year copper inventory was at a 30-year low and prices remained high despite the stronger dollar. Given the bottlenecks at transportation, refining and smelter levels, we expect tighter markets than in the past. Much of the expansion in base metals and copper is done at mines that have been expanded. There are not any new, robust projects coming in. The system is very tight and constrained, so prices should remain higher for a long period of time. In prior decades, the returns on capital of the energy, metals and mining stocks were far below those of the S&P 500, but we believe this trend has reversed itself. With returns increasing, new investments can be expected going forward. It is going to take time before there are meaningful supply increases, but the important thing is that the trend has reversed itself. Q:  What are the risks related to the sector growth? The general public often relates the higher prices with speculation, not with the growing demand of the huge population of China and India. A: Exactly. One of the biggest risks to this commodity story is a global recession, especially in China and India, because that is where we have seen most of the growth in demand. But the cycle is getting longer because of the long-term demand trends in these countries. There is a major difference between natural resources stocks and Internet or technology stocks – our companies are generating earnings and cash flows and still trade at multiples that are slightly below the S&P 500. Even though we had a nice run over the last couple of years, the sector is attractively priced based on the multiples. Q:  Can you describe your research process in terms of understanding both the macro trends and the micro story at the company level? How do you divide your resources? A: We view ourselves as topdown managers and we start with a view on which commodities are most attractive from a supply/demand standpoint at the time; what are the opportunities in different regions of the world based. Once we get an idea of the trends, we drill down and look at companies that have reserves, production and cash flow growth. That can be small or large-cap companies. We start with a top-down view on Mondays, when we have portfolio management meetings. We meet with the team members of other funds and we focus on broader macroeconomic issues, such as global economic data, currencies, etc. Tuesday through Thursday we meet to discuss individual industries and sectors related to resources such as energy, steel, timber chemicals, base metals and mining. On Friday, the investment group meets to review commodity price actions, trends, as well as currencies. So we start topdown in the beginning of the week and then through the week drill down on individual industries and stocks and wrap it up with a general commodity meeting at the end of the week. Q:  How you analyze individual companies and deal with the different international accounting standards? What are you looking for and what are you trying to avoid? A: It may sound overly simplistic, but from a bottom-up standpoint, we stick to the notion of growth in reserves, production and cash flow. A recent example is Petroleo Brasiliero ((PBR)). It is a major Brazilian oil and gas producer with double-digit production growth, trading at single-digit multiples and paying a dividend of 4% - 4.5%. We bought the preferred shares that trade at 14% discount to the regular common stock and that further enhanced the dividend yield. We rely on in-house research and quantitative methods to sort through the vast amount of data on companies. We travel the globe meeting with managements of companies, and learn more about the cultures of individual countries, which helps us get an edge. Just in the past three weeks we have been to Kazakhstan, Mongolia and China to identify new investment opportunities. Q:  In terms of portfolio construction, do you follow a benchmark? How many stocks do you own? A: Our benchmark is 70% energy and 30% basic materials. Even though we are international managers, typically we are compared against the S&P 500. We tend to hold a large amount of stocks, about 150 names or higher. Our biggest concentration is in the top 30 stocks, which tend to be larger, more liquid. Flexibility is what differentiates us from the peer group – we are neither small nor large-cap; we are global; our universe is broad and we basically go where the opportunity is. Q:  As new oil supplies tend to contain higher levels of sulfur, the heavy crude refiners like Valero, are poised to benefit from the growing demand for refining. Do you see an investment opportunity in that scenario? A: Yes. Definitely the refiners with more complex refineries benefit from the trend. Valero's ((VLO)) stock has done very well because of the growth in earnings and cash as the company was buying cheap heavy and sour crude oil, and refining it into highpriced products like gasoline. The incremental production out of the biggest suppliers of oil, such as Saudi Arabia, is getting more sour and heavy and we think this trend will continue and drive profits for refiners higher. Q:  What is your view on Liquefied Natural Gas, or LNG? A: LNG is growing as part of the global energy mix. The growth is partly because higher oil prices have brought up the price of natural gas, and partly because of the environmental benefits of natural gas, such as cleaner burning and less humidity in the air. The biggest issue is that building plants and terminals is very costly. It will take time and billions of dollars before we get close to a true LNG trade, but this is a longer-term theme. We will see a lot of infrastructure development in many parts of the world and a lot of money invested in that area, all because of high oil prices. If the price of oil falls back to $30 per barrel, that would slow down or even stop the plans for LNG and more exotic technologies. However, long term, we are bullish on high oil prices and on LNG growth. Q:  Are you bullish on coal prices as well? A:We see a continual opportunity in the metallurgical coal stocks, which is an interesting supply/demand story. Fording Canadian Coal Trust ((FDG)) is one of our larger holdings and one of the largest metallurgical gray coal producers of in the world. It pays 4.5% yield, but we expect higher coal prices to filter through the company’s earnings in third quarter and the yield to triple to 11%. Q:  How do you value risk? What type of risk do you monitor and try to avoid? A: We are very focused on stock price volatility and inter-market correlation between the various natural resource sectors and commodities. When we see correlation between the different classes increasing, we do more research to understand the drivers and to decide if we need to change the position. We track volatility on a daily basis and that helps us manage overall fund volatility better. It’s also good way to monitor what’s driving stocks day-to-day rather than just watch the headlines.