Q:  What is the history of the fund? A : W.P. Stewart is a global investment advisor that has provided equity portfolio management services, mainly through separate accounts,since 1975. Since inception, our U.S. Equity Composite has returned 16.4% post-fee versus an 11.7% return for the S&P 500, as of 12/31/09. The W.P. Stewart & Co. Growth Fund, Inc., formed on February 28, 1994, is an open-ended equity mutual fund domiciled in the U.S. that provides access to our 35-year-old strategy. The fundinvests in 20 U.S. high-quality growth stocks. Q:  What core beliefs and principles guide your investment philosophy? A : Our investment philosophy is based on the conviction that long-term, consistent earnings growth drives long-term investment returns. Our belief is that by identifying a concentrated number of high-quality companies that can grow earnings faster than the market on a sustainable basis, we will be able to achieve superior returns for our clients. Also central to our philosophy is the belief that compounding wealth requires preserving capital in down markets. Q:  How do you define “high-quality growth?” A : For us quality means quality of the business. We’re seeking a company that has a real moat around its business. We’re looking for companies with recurring revenue streams with good volume growth and that are industry leaders with great management teams. We focus on companies that have strong financial positions, generate consistent free cash flow and have conservative accounting. Q:  How does your investment philosophy translate into the investment strategy? A : The fund invests in U.S. large-cap companies with market capitalization of $3 billion or more. The fund employs fundamental analysis focusing on factors like the company’s record and projections of profit and earnings growth, accuracy and availability of information, lack of cyclicality, large market capitalization and liquidity of the company’s securities. We limit the number of stocks in the portfolio, usually at twenty. Q:  What are the analytical steps in your research process? A : The research process is a team-based process involving eight investment professionals. Our universe is comprised of 40 to 45 names that meet our quality criteria. Currently, we have 42 names in our universe. There are numerous organic ways in which we generate the initial idea. We have analysts that cover specific sectors internally here who are always on the watch for a company that is either fundamentally improving or a new company to the sector by means of a spin-off or an IPO. We also tend to come across new ideas when researching related areas as well as running various screens. In terms of the research process, we put one person in charge of each company, normally along sector lines. The analysts will do all the traditional research by looking at the industry and the customer group, doing financial modeling, going through quarterly and annual regulatory filings and annual reports and visiting the company. We also listen to conference calls from the company and competitors, and when the analyst has gotten comfortable enough that this seems to be a good idea, they’ll present the company to the investment team at one of our twice weekly team meetings. At that point, the investment team discusses the company in detail and votes on whether it’s a good fit or not. We’re looking for a strong majority that believe the company or the industry is worth pursuing. Once we have decided that we should do more work on it, the analyst then develops a detailed five-year model. In general, we’re modeling out an income statement, a cash flow model, a balance sheet and a business operating model. We develop and maintain a detailed five-year profit forecast for each actual and prospective investment that we monitor. Based on these forecasts, we establish a long-term future fair value for each business, assuming a normalized economic and interest rate environment. We then calculate the current fair value by discounting back the future fair value at an interest rate that includes a risk premium appropriate to each investment. The result or 'present value' represents our idea of a fair price for each company's shares. These estimates are routinely updated reflecting the ongoing research and analysis conducted by our investment team. Q:  Can you elaborate your research process in terms of the industry and company-specific perspective? A : We do have a very strong industry bias and are looking for high-quality sustainable growth companies. But there are highly capital intensive or cyclical industries or commodity-oriented industries that don’t fit that mold. For example, the oil and gas business is an industry that we tend to shy away from as the price of oil is highly unpredictable. Similarly, a highly capital intensive industry such as the airline industry is not a particularly attractive business to us. We are interested in the credit card processing business of Visa Inc or MasterCard Inc where they operate a fixed network and every incremental transaction is run over the system at very high incremental margins. A branded consumer staples company like a PepsiCo or Procter & Gamble would be attractive to us. We think that there are many barriers to entry in that business. Brands, distributions systems and scale are a huge barrier to entry. Moreover, the capital requirements of that business are not nearly that significant. MSCI Inc is an example of a company that we recently sold but is still in our universe. The meltdown experienced by the market in October of 2008 had a profound effect on MSCI’s share price as it got down into the low teens but we had the conviction to buy. People were worried about the earnings revisions and compression of stock prices and what that was doing to ETF demand, which is part of their business, but the company’s strong management team, generation of free cash flow, and lack of leverage gave us conviction that the shares were attractive. The reason for buying this holding was because of the staying power of this company and the strong fundamentals of the business. Today the stock is north of $30. Q:  How do you deal with companies who make sudden acquisitions? A : First of all, we do meet every management team that we’re invested in and spend a lot of time talking to them, listening to them, and following their actions over a period of time. We have a pretty good feel for what they are going to do over periods of time and how conducive they are to doing accretive acquisitions versus how willing they are to do dilutive acquisitions. For instance, there are certain people in the media business that have a long history of a willingness to build their empires and to do dilutive acquisitions and those are the types of companies that typically do not get in our universe. We’re looking for organic-growth type companies. We’re not looking for companies that grow primarily via acquisition because that does raise the risk. We focus on trying to find companies with rising return on equity and return on invested capital. Q:  How do you construct your portfolio in terms of the number of holdings and benchmark? A : We have a concentrated portfolio having 15 to 20 companies. In terms of individual holdings, our weightings range between 3% and 8%. The maximum weighting that we would allow is 10%. Our goal is to deliver superior, sustainable returns by investing in a concentrated portfolio of high quality and steadily growing businesses. The fund invests in the stock of companies operating across diversified sectors. It benchmarks the performance of its portfolio against the S&P 500 Index. But there are certain businesses where we just don’t have much representation like the utility business or commodity-type industries like metals and mining or the oil and gas business. Within different sectors, we don’t have a hard cap on a particular industry but we definitely have an awareness of where our weighting is in a particular industry. Q:  What is your perception of diversification? A : For us diversification is trying to be cognizant of the risk of any one factor dramatically impacting our portfolio performance or our earnings growth rate. We have around 20% to 25% of traditional technology companies in the portfolio. Business services companies represent another 10% or 15% of the portfolio. We have consumer discretionary names and consumer staples in our portfolio. We also own a number of companies in the retail business but each company is in a different area of retail. Financial exposure is about 10% and industrial and healthcare exposure are each 8% to 10% of the portfolio. Thus, we have exposure across a number of different sectors as well as sub-sectors. So we are diversified by industry and not overly focused on a single driver of long-term performance. We also have diversification via where the revenues are coming from. We expect that approximately 42% of the revenues from our companies will come from international sources and 58% from domestic sources. Q:  What are the risks in the portfolio and how do you mitigate it? A : There a number of risks that we watch out for. First, the risk that we’re most concerned about is earnings growth where companies don’t execute for one reason or another and fall short of our expectations. The quality of the company is a way to mitigate that. Second, in terms of systemic things, currency fluctuation is not a forcastable risk but one which we keep an eye on. Third, we look at the long-term competitive positions of our companies. Given that they are all U.S. based, we’re obviously concerned about the competitive position of the U.S. on a long-term basis. Q:  What do you consider as downside and how do you protect it? A : There are many ways to mitigate downside. First is through the quality of companies. Second is within a portfolio of 15 to 20 names we can actually tilt the portfolio at appropriate times to further insulate our clients from some specific risk. And then the third is we are not bound by individual sector weights. For instance, if there is a sector we don’t like, we just don’t have to be there. Likewise, if there is one sector that’s undervalued, we can have a bigger than index weight. Q:  How has the financial crisis of the last two years impacted your investment process? A : The last two years have been a great learning experience for us from a number of perspectives. I think that it really taught us that liquidity is important. Another thing that we learned was when there is a panic; there will be great bargains if you have done your work and are willing to invest. The real key here is to be prepared and have conviction in your work.