Q:  What is the history of the investment company and the fund? A : Launched in 2002, A.Q. Johnson & Co., Inc., is an investment firm based in La Jolla, California. We manage individual portfolios for high net worth individuals, corporations and foundations. The firm also manages a no-load mutual fund, the Mundoval Fund, a large cap global value fund started in September 2004. Currently, the Mundoval Fund has assets of $10 million. Q:  What core beliefs and principles guide your investment philosophy? A : The Mundoval Fund adheres to an investment philosophy that is based on value. We believe that businesses purchased at prices less than their intrinsic values help to protect capital from significant loss and provide for a satisfactory rate of return. We subscribe to the concept that “when you own common stock; you own a piece of a publicly traded business.” Thus, we see ourselves as business owners rather than market speculators. In short, we try to buy outstanding businesses at a discount to their underlying value and the matrix by which value is determined is primarily through a discounted cash flow analysis. Our conviction is that we are going to be better rewarded by owning quality, outstanding businesses that even if we had to pay somewhat of a higher price for it, the underlying returns are going to be significantly larger over time. Q:  Would you explain your investment philosophy with a few examples? A : We are value investors who believe in buying stocks of companies that trade at reduced prices but have excellent growth potential. More specifically, we want management to own a lot of the stocks themselves. A case in point would be the healthcare arena. Over the last few years in the U.S., there has been a tremendous amount of uncertainty in the pharmaceutical industry with regards to their ability to protect patents on the various medications and drugs that they have normally relied upon to continue to generate large amounts of cash and be able to do the R&D that is required to come up with the next block buster drug. Therefore, companies like Pfizer, AstraZeneca, Novartis, Sanofi-Aventis, and Johnson & Johnson for a rather extended period of time have sold at prices that truly do not reflect the underlying valuation of the actual businesses themselves. Our analysis has made it very clear that although there are certain risks with regards to their pricing power going forward, as it pertains to upcoming healthcare changes, there still are only a handful of these companies that are able to essentially do the R&D and/or have the cash flow to be able to acquire smaller businesses to bring these block buster drugs to the marketplace. As a result of that, we think that the healthcare sector here over the course of the next four or five years is going to be a very profitable and a sound place to invest not only because of that macro trend, but more importantly, is that we can buy these businesses today at 50 to 60 cents on the dollar. Moreover, while we wait for that value show itself in the marketplace, we are getting paid very attractive dividend yields today. Most of the companies in the pharmaceutical sector are paying 4% to 6%, dividend yields right now. We see that as an area which has been mis-priced and where there has been undue negative perception. But, we think that our shareholders are certainly going to be able to participate in the ongoing growth of these businesses and really not have to pay a premium for it today. The other area where we have found there to be a fairly large disparity between price and value would be in the information technology sector. We have been owners of Microsoft and Cisco Systems and eBay and Dell Computer for a number or years and these are businesses that are the market share leaders in their respective industries. Ten or fifteen years ago we would have had to pay 35 to 40 times earnings to own these types of businesses. Today, Microsoft and Cisco, both trade for about 11 or 12 times earnings. Both of them are generating more cash flow today than they ever had historically and they are continuing to grow rates of return on capital that far exceed their underlying cost of capital. Many of these companies in the information technology sector are more valuable today than they were in the late 1990s. And yet, because share price performance has been lackluster in recent years, the general perception has been that these businesses are not going to be able to provide the same kinds of returns going forward. Ideally, we want to own companies that are going to increase their value rather than just maintain a certain value and stay static. It makes a lot more of sense for us to buy into businesses that are going to grow at a reasonable price. Q:  How does your investment philosophy translate into the investment strategy? A : The investment strategy focuses on value style investing. Under normal market conditions the fund invests primarily in large capitalization common stocks and American Depository Receipts. The fund applies the same investment process consistently, regardless of broader market conditions in that we seek to make long-term investments in businesses that are trading beneath our estimate of their intrinsic value. We believe that buying companies at a discount may provide a margin of safety against the risk of further price declines. Q:  What is your definition of intrinsic value? A : In our view, the intrinsic value of a business is equal to the net present value of the future free cash flows that are paid out to long-term shareholders of a business. We look at the free cash generation of a business historically and determine a very conservative rate that it would be able to grow at in a five- to 10-year timeframe and then discount it back to a current present value after subtracting out all long-term capital debt. Q:  What is your perception of a “value trap”? A : My interpretation of a value trap is we would rather own shares in companies that five, ten years from now are going to be worth considerably more and have the ability to use their underlying cash flow to maximize wealth for their shareholders. We focus on the ability of a business to generate cash in excess of the capital expenditures that are required each year to maintain their plant, property and equipment and then take that extra cash and use it in a way that is going to help the business grow. Q:  Is a catalyst a necessary part of your investment process? A : Yes, it is. We look at catalysts, but then again we are not in the business of trying to predict or forecast necessarily things that are beyond what we already understand. We would rather know a lot about a few things than try to be generalists and try to know about every industry. Our belief is that if we owned businesses that have pricing power while not having a lot of competition, they would be the types of companies that over the course of a long period of time are going to do very well for their long term shareholders. Q:  Do you follow any particular industry or sector while doing your stock selection? A : We don’t make any sector-specific bets. There are certain industries that we would just rather avoid like steel and automobile manufacturers because the industry in general hasn’t provided a lot of wealth opportunities. On the other hand, liquor and beer are outstanding businesses. For instance, we own a company called Diageo plc which is engaged in the drinks business with a collection of international brands. Their brands like Johnnie Walker Scotch and Malibu Rum have become very prominent not only in the UK and Europe but in many of the emerging markets worldwide. The company has incredible margins and tremendous free cash flow generations and we are confident that over the course of the next seven to ten years the company is going to continue to be able to generate satisfactory returns on their underlying capital. Q:  What is your research process? A : We seek companies with easy to understand business models and a consistent history of generating free cash flow. Most of our ideas come by way of various types of reports that we get. We subscribe to specialized databases, get reports from the actual companies themselves, or do a lot of analysis based on the SEC filings or the 52-week low list. We often get information from third party research firms and company annual reports, 10-Ks and 10-Qs. The screens that we do are more focused on companies that historically over the last five years have generated returns on investment capital that exceeds 15%. We also screen for companies that have been generating a certain amount of actual cash flow. We basically look at the free cash that the business has been showing over the course of the last five or ten years. Next, we like to determine if these businesses, in addition to being market share leaders, are capable of expanding their sales globally and using free cash flow to buy back stock, pare down debt and make strategic acquisitions in the future. We look at the historical rates of actual cash flows relative to their revenues and grow those cash flows out at a conservative rate of return and discount them back to a net present value at a fairly conservative rate as well. We do not buy the entire business but a piece of it in the form of shares. We are more inclined to look at opportunities where there has been some negative news and the outlook is uncertain. This usually offers us an opportunity to take advantage of the disparity that exists between the actual valuation of the business and its current share price. What we are really looking to own are market share leaders. As a rule, we do not have a lot of interest in buying start-up firms that do not have any operating history. For example, presently, Time Warner Inc., a media and entertainment company is a business that we own as we think it is worth a lot more than it is selling for today. Q:  How do you build your portfolio construction? A : Typically, we own anywhere between 30 to 40 stocks in the fund with an initial position of somewhere about 2% to 2.5%. We do own some holdings today that are upwards of 3% but don’t allocate to any one industry sector more than 25%. Currently, the biggest sector concentration is healthcare at about 24%. The average portfolio turnover of the fund is between 15% and 25%. We tend to have a three-to-five-year holding period, sometimes even longer than that. We compare our performance to the Morgan Stanley Capital International World Index and the S&P 500 Index as well. Q:  What is your sell discipline? A : We will sell a business if it has become fairly valued or if we find another opportunity that provides us with a better margin of safety. Also, we will sell a business if the fundamentals have deteriorated and the intrinsic valuation of the business has essentially reversed itself.