Q:  What principles guide your investment philosophy? A : We seek to provide long-term growth of capital by investing primarily in common stocks with a long-term investing horizon and mindful of opportunities. We also consider ourselves opportunistic investors, meaning that we are prepared to look at companies across various market capitalizations and sectors. Q:  What is your definition of “opportunity”? A : Opportunity, for us, is what we see as attractive upside to our estimate of fair value. While looking at a company, we analyze what we think that company is worth and where we see upside. That is what we consider an attractive opportunity. Also, we focus on investors’ sentiment, the company valuation and the economic conditions. These three metrics collectively present us with investment opportunities. Most importantly, we need to have a different perspective. Q:  How do you turn this philosophy into an investment strategy? A : We have three investment strategies that we use to approach the market. The first is the “profile strategy,” which we use to evaluate companies that are in the growth segment of the market. We are looking for companies with strong competitive presence, high return on invested capital, strong or stable growth potential and opportunity. The second strategy is the “hurdle rate strategy,” which we use for investing in cyclical industries. It is our belief and understanding that capacity will free from industries that are not generating adequate returns and it will flow toward industries where returns are strong. In a cyclical industry they go through periods of earnings above normal rates of return to below normal rates of return. When returns do improve as supply and demand come back into equilibrium, the industry players that remain will see a strong rebound in profitability. The third strategy is called the “bankable deal strategy.” This is basically our deep value strategy where we take a company specific risk approach. We believe that at a certain level price becomes a catalyst and that is where we assess an entity’s value to a strategic or a financial buyer. Q:  Would you describe your research process? A : Our research department is organized along industry groups, each of them having a number of analysts who work in the group on the ground assessing opportunities in the sectors that they cover. Once they find something that they think meets both the strategic and our valuation discipline, they will write a buy recommendation for the security. Then, it will go through the peer review process where another analyst reviews the ideas and signs on as a partner for a shared signing on the idea. Later on the analyst and their partner will present that stock to our Senior Research Group, which functions as our portfolio management committee. At that stage of the process, we add a presentation on why the idea fits the strategy in question and the valuation disciplines. We have a very intensive question-and-answer process about what might happen under certain conditions through which the members of our Senior Research Group or Portfolio Management group will determine how compelling the stock is in terms of value at current levels, before we include it in the portfolio. What really differentiates our research process is that, first of all, all of the analysts are applying the same strategies across industry groups. The second distinguishing feature is that there are a lot of checks and balances in the system. They are applied by the analyst doing the due diligence on the ground and making sure that it fits what we do, and then by another analyst who signs on as a peer review analyst willing to share ownership with the idea and present it to the broader group. Finally, we have the group review and group presentation in place, where we fit and go down the idea by applying another level of both due diligence and ownership over the idea. In this way, before an investment gets into the portfolio it certainly has been kicked around quite extensively. As part of our research process, we review all the publicly available filings, the annual reports, the quarterly leases; we listen to the conference calls and we check the transcripts. Furthermore, we usually talk to a number of sell side analysts. In many cases we are plugged into networks of industry experts where we can speak to people. We generally have discussions with the management of the company before we make an investment. We do it all from proprietary research using non-Wall street sources such as buyers and sometimes, and we will also talk to competitors. We use the Wall street analysts largely for information purposes, because they have access to a wealth of information, not so much for opinion. In short, we use all possible sources of information. Q:  Could you provide an example to better illustrate your research process? A : for example, at the beginning of 2005 we started buying broadly Coca-Cola, which we don’t own any longer. We had been following the stock for quite a while, but we always thought that Coca-Cola was a company that just sold at too high of a valuation multiple for us to consider including in our portfolio. Between 2003 and 2005, we started to think that the company was getting to a price where it was worth considering. We took a hard look at Coca-Cola and we could understand why the company had gone down so significantly. They had a dysfunctional relationship with their bottling system for a number of years. At a time of concerns that carbonated soft drinks in the united states were losing share and were declining, there was a new management team with new initiatives put in place to jumpstart growth, particularly in the us. What we did was we tried to analyze whether there was any merit to those arguments. It was our belief that after years of putting too much pressure on the bottling system and discouraging investment by the company’s bottling partners, the management now was really trying to have a more balanced relationship with the bottling system. We thought that that was most certainly a historical problem but probably not one going forward. Apart from that, we definitely thought that there was validity to the point of declining carbonated soft drinks buyers in the US. On a different note, almost everybody that covers Coca-Cola on the sell side is based in the US. Coke had about 20% of their sales in the US and about 80% of their sales were outside the country where they had similar profit makeups. There were a lot of fears about Coca-Cola’s performance but in many cases they were all rooted in history, not necessarily prospectively, and in some cases it was just myopic in terms of looking just at the us whereas the vast majority of their business was overseas. That was why we bought the stock following approval by the senior research group. Whenever we recommend an idea, one thing that we always do is we establish a set of monitoring points. We have a vision of how the future is going to evolve when we make an investment, so we lay out some points that we would like to see progress against. The monitoring points for Coca-Cola were improving global market share, improvement in their non-carbonated soft drinks portfolio, healthy emerging market’s exposure, a weak dollar, and some other less significant factors. We looked at how it had been performing, reassessed our valuation of the company, and looked at how it was tracking the monitoring points that we established for it. As soon as we agreed that everything was going very well at Coke, we actually made a decision to double the position in early 2006. So, at the time when it was recommended and approved, we assigned a “buy” directive and then subsequently on the trading desk we put a price under which we would buy the stock and a price above which we would sell it. When Coke was trading at a significant discount to what we saw as fair value, we doubled the position and then once it appreciated to reach our final estimate of fair value we sold the stock. Q:  What are the core elements of your portfolio construction process? A : We mostly employ a bottoms-up research process. We have some top down influence in that when we see extremes, we will make a case. For example, our top down guidance is any recovery that we have is going to be reasonably muted; so therefore, we are not going to be taking a strong rebound in demand into the financial models. But other than that it is a bottoms-up analyst driven process. Our portfolio allocations are a result of what has been recommended and what has been approved and where the analysts on the ground and different sector groups see the opportunities. At present, we have a reasonably strong overweight in technology but that is not because the portfolio manager or one of the other members on the Senior Research Group has mandated we like technology. It is because the technology analysts have found strong value and they have made a compelling case for the opportunities in that space right now. That’s how the allocation in the portfolio occurs – we don’t target certain weightings. For instance, if we don’t see any value in material stocks, we won’t have any material exposure in the portfolio, and if we don’t like retail, we won’t have any retail exposure either. The other side of that coin is when we became very bullish on energy earlier this decade, we had a weighting in energy that was much in excess of the benchmark weighting. We consider ourselves relatively benchmark agnostic, hence we do not think that just because a company has a representation in the S&P, or any other appropriate benchmark for the product, we have to have a certain benchmark weighting. We go where the value is and we stay away from where it is not to be found, so it is really a question of populating the portfolio from the bottoms-up and letting the weights come as they are. The next step in the portfolio construction deals with how we get capital from a newly approved idea. At any given point in time we maintain a list of stocks in the various portfolios that we see as potential upgrade candidates. It may be for a reason because it is close to our estimate of fair value without much upside left in it, or perhaps it is not tracking our monitoring points as well as we would have otherwise liked. So at any point in time we may gain sources of cash, if you will. Q:  How do you perceive risk and how do you control it? A : Whenever we are ready to buy a stock we assign its buy and sell price. As time passes, we’ve got to reassess the valuation. We need to make a strong statement to people that it is worth more than it was when we bought it and there is a scope for additional upside. As equity investors, we try to minimize having big capital losses in the portfolio. We truncate risk by making sure that when we evaluate a company, it fits one of our investment strategies and we do intensive research, checks and balances. We think that the best way to minimize risk is to take a small loss early than take a big loss later.