Q: What is unique in your approach to fund management? A: We have a multi-manager approach, or sub-advisory approach, which is a little different than a manager selecting individual securities, and so the comments that I will be providing you are all in that context. As far as the investment philosophy is concerned, again we use a multi-manger approach in constructing the fund. Our objective is to be market-oriented. In other words, not to take a narrow view on the real estate security sector, but to get broad exposure for our investors. One of the advantages we have in using the multi-manager approach is that we can blend complementary styles and provide a very broadly diversified portfolio of real estate securities with an objective on our part of providing higher-than-benchmark returns with approximately average benchmark risk. Q: And how do you achieve that? A: Our objective is to be a very consistent fund. By the nature of the sector that we are in – real estate securities – we are value-oriented. It is a sector that pays higher than average dividends and as such is really a value-oriented sector. Now, within the sector, what we call market-oriented as opposed to growth-oriented means to be more in the middle in terms of how we are positioning the portfolio, and the mangers that we select share that philosophy. Q: One of the attractions that investors have when they invest in the real estate oriented funds is dividends. Is that also part of your objective? A: It is. In the REIT sector, the range of dividend yield is fairly narrow, so you wouldn’t find too much disparity based on a style. Typically some smaller REITs, which may not be as well capitalized as some of the larger REITs, might have higher leverage ratios and other things, which impair their operation. And they will pay a little higher dividend to compensate for the fact that they are maybe not as attractive to investors over the long term. So, if you look at our portfolio, it is slightly below the average dividend yield for the benchmark, very slight, within about 50 to 100 basis points, but we have what we feel are a very high quality group of companies in the portfolio. So that’s really the tradeoff here. Q: What are you trying to achieve through multi-manager approach that a single manager may not be able to achieve? A: The heart of the process is the manager selection and that is what makes Russell unique across all the asset classes because we do use a multi-manager approach. So, our value added really comes in the manager selection process - in the way that we blend the managers into a single portfolio. The process that we use is very systematic and consistent across asset classes and it involves ranking the universe of real estate securities managers. Currently, that universe is roughly 20 managers that would meet minimum levels of qualification. We rank them according to several criteria, including the strength of the organization, the people in the organization, the strength of their investment process, and the validity of their strategy in terms of our view of the current market conditions. We do look at their performance track record mostly as a way of documenting how they have performed relative to their strategy. We have a very extensive process, which includes collecting quantitative data on the managers, and doing extensive due diligence in terms of visits with the managers in their offices and our offices. We are constantly reviewing the universe of managers, and we periodically rank the universe and include the highest-ranked managers in our fund and other portfolios. We have three managers currently. They are AEW Capital Management, Invesco, and RREEF. Each of the managers that we have in the portfolio shares certain things in common. Each one has very strong public securities capabilities but they also are part of a broader real estate investment management organization that has expertise in investing in private real estate and they have very strong research groups that study the real estate capital and property markets. That research is integrated into the portfolio positioning that each manager uses in terms of their property sector weights and company selection. Philosophically, we think that is very important and is a very significant factor in our selection of our three managers to be included in the fund. The styles are slightly different. AEW has a more value-oriented style than the other two, but it is really more a matter of degree. I would describe RREEF and Invesco as both being very market-oriented in terms of how they position a portfolio - without a clear bias towards value or growth within the REIT sector. Again, we consider REITs as a whole to be value stocks, so it is a matter of degree really. Q: Once you select the managers do they always stay on the fund? A: Our objective when we hire managers is to hire them for the long term. We don’t have an objective of making changes frequently. It is not an efficient approach. But if we have cause to be concerned about a manager and it leads us to review the ranking of the manager, we are not hesitant to make a change. The precipitating factors are things such as a major organizational change, change in ownership, or departure of a key person. These factors can affect our view of their ability to perform going forward. The other factor that is extremely important in this sector, because it is a fairly small capitalization sector, is that we are very sensitive to the managers maintaining a base of assets that isn’t too large. It can be a problem in a sector with a relatively small market cap, say roughly $160 billion dollars or so in the universe, if the manager gets too large of a base of assets under management. It affects their ability to make adjustments in the portfolio and to access some of the smaller companies. In effect, it really forces them to hold some of the larger companies in the universe, because of the size of the asset base. Those are just a few examples of things that would precipitate an evaluation and potentially a change in our manager lineup. Q: How many changes have happened since the fund’s inception? A: The fund has been around since 1989. It was originally established with one manager. A second manager was added in 1996, and the third manager was added in 2000. We have made some changes to that three-manager lineup over time. Q: What happens to the fund when you add a new manager? Do you accept new assets and allocate it to the manager or you divide the existing assets? What is the process? A: That process is managed very closely to minimize trading costs, to make certain that any securities which fit both managers’ portfolios are transitioned into the new portfolio and any liquidations that take place from the old portfolio are done in a way that maximizes the proceeds from that liquidation. Each of our managers typically holds somewhere between 30 and 40 individual securities. When you combine all that into a multi-manager fund, we have something close to between 55 and 70 securities. About two-thirds of our portfolio is in the top 20 securities. So, the complementary securities, those that might just be in one of the three managers, would be smaller holdings but they can be important when you are looking at property sector exposure. Not all managers invest in all REIT property sectors. Some of the specialty sectors, such as healthcare, are part of certain managers’ investment strategies and not others. So, by including multiple managers in a single portfolio, we get better exposure to all our benchmark sectors, which we might not get if we had a single manager. Q: If an investor or an advisor says: “Okay, I can have three different funds in which I could be invested in, and for me that is my multi-manager approach.” How would you answer that? A: We have an ongoing research process, where we are evaluating the broad universe of managers and constantly ranking them in terms of identifying the strongest manager. We think that is going to allow us to implement a multi-manager strategy better than somebody who picks three managers at one point in time and is done with their implementation. I think that is really a critical factor. At the same time we also give a lot of thought into how the managers complement one another, how consistent they are with the objective that they have for our fund and we think we can add value through that process as well. I should also mention that we do have access to managers who may not be accessible through other means efficiently, because we are basically dealing with a broad universe of managers, many of whom work with institutional investors. Q: When you added a second fund company in 1996, and again in 2000, what reasoning did you give as to why that style was necessary to be added and why was the third style necessary? A: One of our objectives in 1996 was to add a new smaller, more emerging manager. In this case, it was AEW. They had a very compelling approach, whereby they were focusing on essentially looking at fundamental value in companies and factoring that into their stock selection process. We thought they were complementary to our existing manager and it also allowed us to bring in a manager that had a small base of assets that could essentially grow over time and also provide some rounding out of our fund portfolio. Q: And what was the reason for adding the third strategy? A: In that case, we were adding a manager that had a slightly more growth-oriented style that was complementary to the AEW style. It had a smaller number of securities in the portfolio, something again that would be a slightly different approach, and something that would round out the overall portfolio. Q: When you measure the volatility, you measure that against what benchmark? A: The NAREIT Equity REIT Index. We look at the performance relative to the benchmark and to the extent that there are sector variances from the benchmark that can explain a lot of the performance. So, we need to make sure and we are successful in making sure that each of our managers are aware of the benchmark that the fund uses and that they construct a portfolio that is sensitive to that benchmark. Q: Are there any other unique risk control-parameters that you measure, or that you put in place that generally a single-manager fund does not have? What is you version of risk control? A: If you’ve got a single manager, you will probably have more variation in that you might have more extreme positions in terms of sector weighting than you have with multiple managers. It is not likely that all three of our managers are going to make the same sector bets with the same magnitude, and so we get some natural risk management in the sense that the significant over-weights and under-weights in each sector will not be as dominant in a multi-manager framework as they would be in a single-manager framework, and that is paired with what we look at in performance results. There are other things that we monitor, too, and it may not be so much risk management but just making sure we have the most efficient portfolio – things such as cash positions, and other items that we want to manage at the lowest possible level so that they are not a performance drag. Q: Maybe you can give us two or three specific examples of what you dictate to these three fund management companies and what you don’t dictate? A: We dictate the benchmark, we will specify the universe that they need to work in, and we will state to them clearly what their objective is for us, for our portfolio. We state what their expected alpha should be, and their risk, or standard deviation, relative to the benchmark. In a general sense, we aim to explain clearly what our objectives are for them in our portfolio. We will give them some general guidance, such as the investment universe they can draw from, so that we might restrict them from investing in stocks outside of the United States for example. That is really the extent of the restrictions. Our job is to very closely monitor the implementation of the strategy and how the three managers combine into a single portfolio, and that is where we track the important measures in terms of securities concentration and sector weights. We want each to implement their style for us. We don’t really gain anything by limiting that ability.