Q:  How would you describe the investment philosophy of the Frost Core Growth Equity Fund? A : The Fund is an actively managed large-cap growth fund with a focus on a rigorous stock selection process. Our investment approach emphasizes a fundamental analysis that incorporates a macroeconomic perspective, helping us identify industries that are poised to outperform. This strategy seeks to balance risk and reward, targeting superior risk-adjusted returns through a full economic cycle. Our goal is to identify well managed businesses with visible growth drivers that focus on the competitive landscape targeting sustainable growth. Q:  What kind of growth are you looking for? A : That largely depends on what industry, sector or market we are analyzing. For example, in terms of an industrial stock, we tend to consider cyclical growth factors more than anything else. In healthcare or financials, we seek stable companies with a story that fits our thesis; among technology or consumer discretionary names, our focus is on secular growth companies. Overall, we look for sustainable growth, analyzing revenues, earnings, cash flow and historical growth rates in companies. Another metric that we analyze is the potential for accelerating revenue growth. Being fundamentally driven investors, we review the business models of potential portfolio holdings and try to extract what makes these companies tick. We place more emphasis on organic growth than acquired growth. On that basis, we seek companies where management has the ability to outperform using internal resources to expand profits. The future outlook for growth is most important to us, seeking companies with a strong growth outlook or improving prospects. Q:  How do you execute your research process? A : We employ a bottom-up, fundamentally-driven research process, focusing on companies that have above-average growth potential. We start with a quantitative growth screen and an initial universe of around 800 to 900 stocks, which may include any stocks with a market capitalization above $1.5 billion. Although we do not strictly pick stocks off that screen, this allows us to narrow down the list and sort the remaining names by a variety of metrics such as expected growth, earnings surprises and estimate revisions. Then we search for companies that can specifically beat consensus expectations and experience continued positive estimate revisions, as we believe these factors tend to drive upside in stocks. Once we have run our screens and found a company that appeals to us, we analyze the industry that they compete in to more fully understand end markets. Generally speaking, we try to identify companies that sell into great end markets. Another factor we take into account is the competitive intensity of an industry. This factor can be broken down further to barriers to entry, the current regulatory landscape, as well as the usual growth, valuation, balance sheet and other fundamental metrics. We also factor in a number of qualitative attributes as well. We try to find companies that are innovative. We believe that innovation typically leads to a sustainable competitive edge, critical for a growth company. Additionally, we analyze companies that have the ability to gain market share with strong management teams and the potential to generate a lot of cash. Then macroeconomic analysis comes into play as we review our sector weightings, also serving as an overview for our stock selection process. At that stage, we try to understand where we are in the economic cycle, enabling us to evaluate where we are in the business cycle, and what major trend changes are underway or should be expected. Finally, we identify what sectors to overweight and underweight given our perspective of the market. Q:  How important is free cash flow to you? A : We believe free cash flow is probably the best indicator of earning quality and is a critical component of our analysis. Q:  Would you elaborate on your research process with a couple of examples? A : One example was the purchase of Fortinet, Inc. (FTNT), a provider of network security appliances. The stock showed up on our growth screens owing to its fundamental momentum, positive estimate revisions, significant earnings surprises and strong growth prospects. We looked at the industry and end market, identifying it as an attractive industry. We also believed, based on our analysis, that there was an opportunity for a smaller, innovative company, like Fortinet, to gain market share and grow earnings. The company’s core operation is based on integrating multiple security functions onto a single proprietary hardware platform that is tied together with a user-friendly operating system. Fortinet designs its own semiconductors, allowing for faster production than other competitors in the market place. Coupling this with their strong and proven management team, and we believed there was an opportunity for Fortinet to gain market share. Additional financial analysis of Fortinet showed they were generating significant levels of cash. Their free cash flow was running more than twice the level of earnings because they had a ratable business model that allowed them to collect cash up-front and recognize revenues over a 12 –to-18-month time period. At the time we bought the stock, it may have looked expensive. In our analysis, we saw a company growing 20% plus a year, a 5% free cash flow yield and a great balance sheet. Moreover, they had been public for a couple of quarters, increasing the visibility of the company, allowing them to go in and compete for some big enterprise deals. We still believe this company’s future is bright even though valuation is currently not as attractive as when we bought it. Another example of a holding that we own in the materials area is a Canada-based company called Potash Corporation of Saskatchewan Inc. (POT). It is the world's largest potash producer, and it presents a case where macro data caused us to watch the stock for over a year. In August 2010, BHP Billiton Limited, an Australian company, made a bid for POT and Potash fought back aggressively. A month later, we saw that industry fundamentals had turned dramatically for the fertilizer market, particularly in potash fertilizer. Later in 2010, the BHP bid got blocked and we saw a company that had great market fundamentals with the position of a turnaround in its business. Estimates were starting to move up and the stock price pulled back on account of the bid withdrawal. Since we decided to move in and buy the stock we have seen demand for the company’s products – particularly potash fertilizer –increase suddenly, prompting significant price increases, resulting in a situation where now where demand is exceeding available supply. Potash Corp. controls about 20% of the global reserves of this material. We believe that the prospects for the company are good, as estimates have continued to move up over the last eight months and the worldwide growth outlook has improved. Q:  How do you keep up with companies in the fast-changing technology sector? A : Our solution to this opportunity is to search for younger companies that are more focused and innovative. We want to see a company continue to innovate, and look for this to be reflected in their gross margins and market share trends. Q:  How do you construct your portfolio? A : Our portfolio generally contains between 50 and 60 stocks. Typically, no individual holding would be greater than 5% of the portfolio, though if a stock runs and we still see potential we will keep it. We regularly re-evaluate sector weightings as the macro environment changes. We may move out of industries we don’t like and may overweight those we do. We stick to the processes we’ve developed over many years, picking companies carefully. The portfolio’s benchmark is the Russell 1000 Growth Index. Q:  What kind of risk do you perceive in the portfolio and how do you contain it? A : At this risk of sounding silly, we’re well aware that the unknown unknowns are the real sources of risk. We believe the best way to minimize risk is to be fully aware of what we own. We work to understand every company that we own inside and out. Secondly, we use portfolio diversification across sectors to mitigate risk, and create opportunity. We have risk metrics that we run on the portfolio regularly, which make us aware of our tracking error is and emphasizes where our active bets are. We look at relative strength, and if a stock diverges from its industry, we understand that sometimes this is an early warning sign as well. The team approach we have created is very helpful because we can divide portfolio responsibilities across several people for a more thorough examination of companies.