Q:  What is the history of the fund and investment management company? A : Murray Fichtner has managed the Frost Dividend Value product since 1993 and the investment team has been together since 2004. Frost Investment Advisors, LLC is a wholly-owned subsidiary of The Frost National Bank, a company with a rich history dating back to the 1860’s. The Investment Adviser was started in 2008 and currently has total assets under management of $6.5 billion, (as of September 30th, 2009). The Frost Dividend Value Fund as first offered as an institutional share class on April 28th of 2008. Q:  What core beliefs guide your investment philosophy? A : We view dividend yields as a reliable measure of a firm‘s value and as a critical component to the total return of a portfolio. Dividends historically have accounted for 40% of the stock market‘s long-term returns, and should serve to reduce an equity portfolio’s long term volatility. We believe dividends matter. We also believe a firm’s dividend policy can be an effective measure of future returns. Research published in 2006 indicated that dividend payers tend to outperform non-dividend payers, while dividend payers that grow their dividend outperform those which maintain or cut their dividend. Additionally, bigger dividends and earnings growth are not necessarily exclusive of each other. Arnott & Asness‘ published research in 2003 indicating that companies with higher dividend payout ratios also had higher subsequent earnings growth. A bigger dividend may constrain management’s tendency to build empires, which tend to be value destroying. Q:  How do you convert these principles into an investment strategy? A : To sustain and grow their dividend, we believe companies will have favorable competitive and industry dynamics as well as superior ROE’s, (Return on Equity), and balance sheets relative to their peers. Using this as a starting point, we focus our research efforts on bottom up fundamentals, incorporating top-down analysis to identify the stage of the economic cycle, and technical analysis to identify entry and exit points after a fundamentally based buy or sell decision has been made. Q:  What form of dividend do you prefer? A : We look for repeatable common stock dividends. These usually take the form of cash dividends though we may consider stock dividends as part of a total yield to shareholders as well. Q:  What differentiates dividend paying companies from other companies? A : We view dividends as a reflection of the quality of a company‘s management, and its business model. We believe management teams that are willing to pay dividends respect shareholder rights and are confident about the company‘s future prospects. As mentioned above, dividends historically have represented 40% of a stock’s total returns, making dividends a differentiating factor. Q:  What is your research process and what analytical steps do you take to determine the investment merits of companies? A : We look for companies with market caps greater than $1.5 Billion and a dividend yield greater than the market or its industry. We generally try for diversification across sectors, but periodically we may decide that an underweight or overweight exposure to a sector is appropriate. Our initial screen limits the investable universe to approximately 300 names from which we cull the names for quality in terms of Roe’s, capital structure, and history of capital allocation. We review this list frequently while continuing the search for new perspective and investment ideas. When we decide that a name deserves additional review, the research staff reviews the business model and balance sheet to better determine whether the firm has a better opportunity to grow their dividend at rates greater than inflation during the current phase of the economic cycle. A key factor for us is pricing power, preferring firms with stable or improving pricing power, reflecting a strong competitive position or favorable industry dynamics. Our valuation work incorporates metrics appropriate to an industry although valuation metrics other than the dividend yield are not part of our initial screen. When an analyst is convinced about the attractiveness of a name, he‘ll bring it to the group for discussion. A recent stock pick is The Principal Financial Group, (PFG), a global financial services company with life insurance and asset management businesses. Relative to its peers, Principal Financial Group has an above average business model in terms of return on equity and competitive positioning. This company screens well in terms of dividend yield, roes, and historical dividend growth, although like many other financials it substantially reduced its dividend early into the financial crisis last fall. Our valuation work indicated that the stock‘s book value was significantly understated because of large unrealized losses in its ‘available for sale’ Fixed Income investment account where losses run through the balance sheet. With improving leading economic indicators and contracting credit spreads, our macro work suggested that the company‘s significant investment losses would begin to reverse, thereby boosting its depressed book value and its still depressed price to Book multiple. After principal improved its balance sheet following a secondary equity offering, we purchased the name. Another example is enCana Corporation, (ECA), one of North America’s largest natural gas producers, which originally appeared on our dividend screen. We don‘t typically have the opportunity to invest in pure-play exploration and production companies, as the variability of their earnings typically doesn‘t support a consistent dividend policy. In examining the name further, we saw that enCana was coming off a disappointing quarter, with the company missing both its earnings and cash flow estimates, while reserve growth was well above that of its peers. Further research revealed that the company had an immense inventory of undeveloped acreage; with very low dryhole risk associated with its development of its unconventional resources, which also provided considerable control over its rate of growth. enCana also had significant exposure in both the horn River and haynesville shale basins, which add two very attractive natural gas assets to enCana‘s deep portfolio of unconventional resources. At the time of its purchase, ECA had nearly $2.6 Billion in undrawn credit facilities, while over two-thirds of its anticipated 2009 natural gas production was hedged above $9 per mcf. enCana‘s hedge position gave us comfort with regard to the sustainability of the dividend, in spite of the volatility surrounding commodity prices, and its earnings outlook. We felt that enCana‘s earnings and cash flow position would improve over the next twelve months in tandem with an improving commodity environment. Additionally, the company‘s Board of Directors had previously authorized a split of the company into two separate entities. This action was deferred as the financial markets collapsed, but we viewed this as another potential catalyst for positive returns, should the fundamental backdrop for commodities improve. Q:  Would you describe your portfolio construction process? A : We have in our portfolio between 50 and 70 stocks with typical weights of about 1% to 3% per security. For a high conviction holding we may have a weight greater than 3%. Our benchmark is the Russell 1000 Value Index. We do not hold ourselves strictly to stocks within that benchmark, potentially having up to 30% of the portfolio held as ADRs (companies listed on a U.S. exchange but domiciled outside the U.S.), as these companies often do substantial business within the U.S. and offer attractive dividend yields. We are primarily a large cap fund and our weighted average capitalization is typically greater than the Russell 1000 Value Index. Our turnover historically has been between 25% and 40%. During this past year turnover has increased to approximately 70%, a result of the extreme volatility in the markets, the result of unprecedented economic conditions. When we buy a stock we prefer to hold it for at least two to three years, barring exceptional circumstances. We prefer to target a higher dividend yield than the market at the portfolio level, rather than simply buying high-yield stocks at the security level. If we have an unfavorable view on a sector/industry we will underweight that sector/industry; for a smaller sector/industry we may decide not to have any exposure at all. We believe this allows us to manage the fund by balancing alpha generation and risk mitigation. As part of our active management of the portfolio‘s structure and positioning we regularly review our fund‘s stock holdings, industry and sector weights relative to the benchmark. Q:  Could you briefly elaborate on your buy-and-sell discipline? A : Our team’s buy discipline hinges on regular meetings and the continuous exchange of information amongst the managers. We examine a stock‘s fundamentals, our investment thesis, and the risks inherent to the company, its industry and sector. This risk discussion applies to both the individual security, and its impact on the portfolio. If we‘re comfortable with the stock at this point we‘ll move to take an initial position. When we are convinced our thesis is correct, and believe the risk-adjusted return potential is attractive, we will increase the position‘s weight. Our sell discipline will lead us to exit a stock if the dividend yield falls below our targeted threshold. This can result when the company has achieved full valuation in our estimation, or when the dividend has been reduced or eliminated. Another key sell signal occurs when the original investment thesis has been broken. Our use of technical analysis on a systemic basis helps us be proactive when a stock weakens. We will re-examine a firm‘s fundamentals and our original investment thesis in terms of the changed circumstances we are seeing. In this process we also look at whether a stock is fully valued or whether another stock offers better risk-adjusted returns. Q:  What risks do you perceive in the portfolio and how do you control them? A : We believe that investing prudently is fundamentally about accepting investment risk while controlling for that risk through a disciplined management process. At the stock specific level we review a company’s business model, their balance sheet, and their relative valuation before we take a position. At the portfolio level, we rely on diversification of holdings and industries as another tool to mitigate risk. We continue to monitor risk by using quantitative tools to measure our individual positions relative to the portfolio and the relevant industry and sector. We monitor our portfolio structure for risks that may be embedded but are not readily apparent. Some risks are obvious, (e.g. a sector overweight), whereas some may be less so, (e.g. a factor risk such as high average earnings variability across the portfolio). As we‘re able to quantify these factors, we can then determine our level of comfort with those risk exposures, and take action where appropriate. Frost Investment Advisors also monitors our fund‘s performance, measuring our risk & style discipline, subjecting the fund‘s performance and holdings to a series of tests quantifying our performance relative to our benchmark and peer group.