Q: What do you see ahead for commodity price movements? A: We believe that, on balance, commodity prices are expected to rise through this decade, and it is that secular trend of rising commodity prices and the related factors that cause us to think investors should take a good look at this sector if they are not already invested. We believe that natural resources are in a 12 to 14 year bull market trend - the big fat middle - with the opportunity to outperform the market going forward. In addition, we divide the 12 to 14 year bull market run into three phases and the first phase is the recovery from the historically low valuations in late 1999 and early 2000 where we saw twenty-year lows - think of oil going from $10 to $50 a barrel. That recovery phase, the first phase, is now behind us. Q: How can investors best use natural-resources investments in their portfolios? What are the reasons to invest in a natural resources fund? A: Investors can get representation in two ways. One is the best-of-breed approach where investors decide, 'I want some money in bonds, some money in financial services, some money in basic industries, and I want to find the best managers for the job in those areas, and as a result they take the responsibility for that asset mix.' Another approach is to view a core-plus-augmentation approach, where the investor is taking half to two-thirds of their portfolio and investing it in long-term, core positions, and then takes the balance to try and augment in good opportunities that look particularly well-placed for the next several years. Both approaches have worked well over time. Both for secular, longer-term reasons and for cyclical economic reasons, we believe that full-weight and even overweight in the resource area should be considered by all investors. There are four key things resources provide. First, it is part of the investment diversification spectrum. Second, it is a better way to participate in general rising demand in the world and in global economic recovery, and an indirect play in the emerging market demand-pull. Third, there is a natural asset value in these materials that may not be true in other industries. In the technology field the value of the hard assets declines to zero with the rise of new technology or a product. In the case of oil, even at a lower price, there is value in the oil in the ground. The fourth, precious metals and energy can be used as an insurance against the potential inflation risk and potential US dollar decline. Since the commodities are priced in US dollars, the decline in the US dollar increases the demand for these commodities outside the US. Q: What is your investment strategy? A: Provide the broadest possible way for American investors to invest in natural resources companies globally. That includes diversification by underlying sub sectors, geographic regions and by market capitalizations. Most other natural resources funds are either only invested in energy or precious metals. We are broader in our investment theme for a smoother experience over time. The global resources space is biased because energy is bigger than all other commodity groups combined in size and in the importance to our life style. Globally, natural resources, including energy, utilities and basic materials account for about 15% of the investment opportunities in the world. We take a several-step approach in managing the money. It consists of one return-seeking strategy and then two risk-minimizing strategies. The first, a return-seeking strategy, is to seek out broad representation in various resource sectors. We start by getting a core representation in leading companies in various sectors. We identify the core company based on the quality of the underlying assets and more particularly the process margin that they endure. Then we actively seek out the explorer add-ons. Here we look for companies growing through the drill bit, companies that are well-managed, good deployers of technology and have strong balance sheets and good asset bases in order to grow their businesses independent of commodity prices. And the third part of our return-seeking process is to make adjustments within the portfolio between the sub-sectors of resources based on commodity price trends. Q: How do you allocate the assets of the fund within natural-resource segments? A: All things being equal, we start with a distribution of half in energy, including everything from super-integrated companies, oil and gas production companies, service, drillers, coal, and alternate fuels. Then we take the other half and split it roughly equally between forest products, everything from lumber to boxes of tissue; base metals, including aluminum, copper and nickel; industrial materials like cement and packaging materials; and finally precious metals, including platinum, gold, silver, diamonds. The last of the smallest part would be agricultural commodities like fertilizers. The Fund today is over $600 million. Over the last couple of years, we have invested about 50% in energy with a heavy tilt in the drilling and servicing side. With the build in inventory we have been expecting oil prices to moderate from $50 to mid to upper $30s in the coming months. Our long term range is $25 to $30, with the expectation that prices will stay in the $30 to $35 range. Many of the companies on the stock market are priced for $28 per barrel and not for $35 per barrel. There is still valuation opportunity and the world still does not believe that these high prices will be maintained and so no one is prepared to pay normal market multiples for peak earnings. Within the portfolio, 7% is targeted to the alternative energy, including coal, such as Peabody. Our rational is that given higher oil prices, coal, which supplies 50% of the electricity in the United States, would see a more profitable environment. And Peabody will be a prime beneficiary of that environment. Part of the reason we have a lack of refining capacity globally is because we have not built a refinery in this country since the mid-seventies. The demand in the emerging markets is creating demand for new refining capacity and this area will earn top returns going forward. An example of a company creating new refining capacity is Valero, one of our top holdings, and one of the top independent refiners in the world. Q: What limits do you place on your sector allocations? A: The highest we've seen energy is around 65 percent. Typically, when we put parameters around the sub-groups: we go as much as 50 percent above or below our energy holdings and we go from zero to 100 percent on the other four sub-sectors. The rationale for that balance should give comfort for investors that they are not buying into one extremely focused and highly risky sector at any given point in time. Q: What are your views on diversification? A: Our Ivy Global Natural Resources Fund offers widely diversified exposure to basic industries, and as such it is somewhere between a pure special-purpose fund and a more modern-day fund. The example would be investors could choose to invest in a pure gold fund and a pure energy fund individually or invest in both of those sectors more fluidly. If we have learned anything in the last three years, it is that diversification by sector is very important and perhaps more important than the diversification by country. When we build the Fund, we diversify. So, again, the fund will own about 55% in energy, and the rest is split equally between base metals, precious metals, forest and industrial products, at about 10% each and then residual in agricultural commodities, such as fertilizers or plant seeds. We are also conscious of geographical diversification. Here we are more interested in where the assets of the company are rather then where the company's headquarters are located. For example, Freeport McMoran is located in America but all the assets are in Indonesia. We look at the geographic allocation, and we end up with 50 to 55% in North America and the rest we follow where the commodities are produced, principally including South Africa, Australia, and South America. We also diversify at the company level with no more than 5% of portfolio is in any one stock. Typically our top 10 stocks are approximately 25% to 35% of the Fund; the top 30 stocks are 65% to 70%; and the top 50 are the vast majority of the portfolio. Q: What is your research staff and process and what are your valuation criteria? A: As part of our valuation matrix, we do a technical analysis overlay and are conscious of the share price levels relative to average prices and trends and will make minor adjustments around core positions based on those technical investments. We maintain individual company models for 400 companies and closely monitor the models of 150 companies by industry sub sectors. We also monitor energy technology developments and keep up with inventory data to decide which industry sub sector to emphasize. Those are the prime considerations we have: which industries are likely to have a period of improving or retrenching prices. Based on the economic and market cycles, we then anchor our Fund with core companies: we call them long-term anchors. We believe that those companies that are the best in their industry will generate profits even in a difficult industry environment - they may be lower, but they will still be profitable. Then we add in a mix of companies that may be second-tier, but have a higher growth rate or may have depressed valuations. So we start with broad universe of stocks, then use the industry data to analyze the sub sector opportunities, then look to anchor the portfolio with leaders and finally add stocks with higher growth rates. Q: What is your sell discipline? A: Our sell discipline is two-fold. If the valuations are higher than our estimates, we sell the stock. If the company has a disappointment in earnings or a fundamental change in direction, we sell. When we invest in growth companies, we are looking for a certain rate of growth. But if it fails to meet our expectations, we sell. Q: What is the outlook for the energy prices and how do you take advantage of in portfolio building? A: Our current outlook for oil prices is that prices should retrench, especially given so many companies are priced for oil at $28 a barrel. The outlook for the land drilling companies in the next year is very good in our opinion, driven by the oil demand. Deeper drilling in the coal mines in search of methane gas will be an opportunity that many of the energy companies will be seeking. This additional drilling will drive the earnings of these companies next year. Land-based drilling of the wells is expected to grow significantly in the next year too. Precision Drilling, a Canadian based company that trades under the symbol PDS on the NYSE is an example. Recently it purchased some land-based rigs from Global Santa Fe and they are likely to expand operations internationally. Another example might be Noble Drilling. We believe that as we enter into a trading range for commodity prices, we want to anchor the portfolio with companies that have a visible asset base and we understand when they will get bigger. For these companies it is not a matter of if or when they find these assets, it is more a matter of when they get to processing this asset base. We are less interested in taking exploration risk and more interested in companies that may have only efficient production risk. As the demand for oil from emerging markets increase, oil suppliers will be looking for more oil. At present the spare supply is less than 2% of the available capacity. This is causing more exploration activity in technologically and politically challenging areas and within reservoirs that are difficult to retrieve.