Q:  What is the history of the fund? A : I have been the lead portfolio manager since the inception of the Scout International Fund in September 1993 and currently manage $4.7 billion in international assets, including the fund and separately managed accounts. Our objective is to invest in international markets with a long term view with relatively low turnover and manage a balanced portfolio of stocks with nearly equal weights. It is an international fund as the name suggests, though we have some investments in the United States as well. The fund has exposure to the developed and emerging countries in Europe, Latin America and in Asia. Overall, the international fund is designed to be a core international holding in a client’s portfolio. Q:  What drives your philosophy in terms of international market investing? A : When investing internationally we are selective in picking the region, industry and a company. We prefer not to make big bets and favor companies that have strong balance sheets and predictable earnings. The basic philosophy is to create a balanced portfolio of industry leaders in stable countries. Generally, we are looking for quality companies with an industry leading position in terms of technology, market share and high barriers to entry. We pay close attention to the balance sheet and earnings history of the company. We always like to understand the local economic situation and political environment and keep abreast of the government’s fiscal situation in the countries we are invested in. We are selective in countries that we invest in as well and we are mindful of how the country is governed, what are the laws for international investors and the enforcement of contracts. Q:  How do you apply your investment strategy? A : The fund normally pursues its objective by investing in a diversified portfolio consisting primarily of equity securities of established companies either located outside of the United States or whose primary business is carried on outside the United States. Equity securities include common stocks and depository receipts (receipts typically issued by banks or trust companies representing ownership interests of securities issued by foreign companies). The fund normally invests at least 80% of its net assets in equity securities. Our strategy is to look at the international economic, political, and market conditions to choose which countries to invest in. We then select the best large companies each country has to offer. We focus on companies with a track record of revenues, earnings and stable but growing customer base. We also look for larger companies that have established strong positions in their respective industries and that are trading at reasonable valuations. The fund employs a very low-turnover strategy, which means that many of the names in the portfolio have been there for years. One reason why we don’t invest in China is an intriguing mix of state control and economic loosening, again reflecting their long commercial history and large involvement of the government from the top. The policies of China’s government are still not friendly to foreign investors and we prefer to wait till that policy is changed. We do not have direct exposure to Japan or Russia and in the core fund we do have 15% exposure to emerging markets. Currently, we have investments in a few Latin American countries like Mexico, Brazil, Chile, and recently divested from Argentina. We have also invested in companies that are based in Western Europe but have significant operations in fast growing Central Europe. We have invested in Coca-Cola Hellenic Bottling SA, which is the second largest bottler in the world with the majority of its operations in Central Europe. We like a couple of Austrian companies in the same way, like OMV Group and Erste Bank. OMV, the energy explorer, has operations in Central Europe, and Erste Bank Hungary NYRT is a member of the Erste Group Austria. Q:  What are the analytical steps in your research process? A : We basically use a top-down approach to stock selection. Our team first examines the macroeconomic climate as well as the political situations in the countries in which to invest, and then disqualifies any company that has been in existence for less than three years. In many ways it's a very subjective process. We read a lot of material available on the Internet and get research material from various sources and analyze what is going on in the different regions and countries of the world and how they fit in the global economic cycle. Then, we modify our position based on what we think the economic outlook for various countries and industries that we are invested in or are likely to invest in. We have a lot of meetings with analysts. Our research process focuses on companies to invest for the long term in stocks that present good growth prospects at a reasonable price. Our experience has been that most of the analysts know their companies very well, but we don't rely on their conclusion or their investment recommendation. We are not particularly interested in a company’s quarterly earnings but are interested in its profitability drivers and its long term rates of sustainable return on capital. We look at the company stock price and its multiple to earnings and cash flow. And we prefer to look at cash flow multiple in some ways more than earnings because that cuts through some of the accounting convention and helps us to understand the company valuation better. We are not creating a lot of our own earnings models but we rely on consensus earnings estimates in many ways and models that look at the changes in those estimates. We will decide to buy or sell or wait depending on the changes in business model and revisions in earnings estimates. As for price targets, we do not establish any for the companies that we invest in. Q:  How do you handle currency risks? A : We do not do any currency hedging or trading. Our philosophy is that we are investors in businesses and let management make that decision. We are mindful of the local currency direction compared to its largest trading partners and it is a part of investment and analysis process but we do not directly take or hedge currency exposure. Q:  How do you deal with the volatility in the international markets? A : Foreign investments present additional risks due to currency fluctuations, economic and political factors, government regulations, differences in accounting standards. Investments in emerging markets involve even greater risks especially those that are dependent on foreign capital. Our evaluation process takes into account all of these factors. Brazil is an example where stocks collectively are getting to be very expensive because the Real has gone up dramatically against the dollar and other international currencies. Part of the volatility in investing abroad is the currency movement and that can have a significant impact on our investment decision. Q:  What is your valuation process? A : We think we should get a better return or a pay a lower earnings multiple for the same company in Brazil versus Canada. But we are more interested in the underlying dynamics in what companies are doing and how much of their business is linked to the global market place and to the local economy. As we look at smaller and smaller companies in the international markets, they tend to have higher and higher percentage of revenues from the local economies. At that time the value of the currency plays a big role in our decision making. For instance, if we compare Brazil based large iron ore miner Vale SA compared to Australia based BHP Billiton, they are both in the same business, but BHP probably deserves a little better multiple because they have a more balanced portfolio. We don't see a lot of difference there. Probably the biggest difference is the Brazilian currency, although, the Australian dollar is high too. We trim the valuation a little in terms of the price-to-earnings ratio that we are willing to pay if we think it is suitable. It is much more of a subjective than a quantitative model. Our valuation discipline is to pay a reasonable price for the stable revenues and earnings growth in a company. Q:  What is your portfolio construction process? A : It is based on a multi-pronged strategy that looks at countries and sectors: countries on one grid, sectors on the other. Where the two of them meet is where we buy. One of our investment themes is to look for industries or sectors in which the country excels. We start with the qualitative analysis and in terms of the quantitative metric we prefer to look at stock price multiple to operating earnings. This helps us to compare earnings on operating basis regardless of the accounting practices of various countries and companies. We also look at the earnings estimates revisions and change in business models if there are any. Our international fund includes companies in developed and emerging economies and companies that fall in traditional growth and value categories. The companies that have stable growth but are out of favor with investors and companies that are growing steadily in stable industry segments and are trading at a reasonable prices. We hold less than 100 stocks in the portfolio and individual holdings are weighted between 0.7% and 1.8%. We generally do not exceed 2% limit for any individual stock. Our typical investment holding period is about five years and portfolio turnover ranges near 20% and our benchmark is the MSCI EAFE Index. We are not closet indexers but we are benchmark aware. We have been historically underweight in Japan and United Kingdom and currently we are overweight in Switzerland and Sweden. We do not really make big country bets but the biggest bet has been on Brazil. This is kind of a deviation to the norm since our largest country positions are in the United Kingdom and Japan, which are also the larger markets, but Brazil has been the biggest overweight for us as a country. It is one of the prime beneficiaries of the growth in China. China imports most of what Brazil makes, from airplanes to iron ore, soybeans, paper and pulp, and agriculture products. From time to time we change our weightings in the fund based on our macro economic outlook and estimates of earnings in various industries and companies. We have increased our weights in technology and now we are overweight compared to the index, while we have lowered our weight in the financials, utilities and consumer discretionary stocks and now we are underweight. Q:  What is your sell discipline? A : Our basic philosophy is to ride our winners and cut our losers. We sell a stock basically for one of three reasons; when the economic or political events in a country is different from our expectations, when a company changes it strategic direction or fails to meet our earnings expectations or because of changes that we carry out in our portfolio. We cut stocks for portfolio reasons which mean that when something does too well and it gets to be too big a position in the portfolio, we will cut it back so that it does not overpower the entire portfolio. What we mean by balance is not having too much in any one bet. We balance the portfolio in terms of the equal weights meaning the stock positions or some kind of balance to the MSCI EAFE Index in terms of country and sector weight. On a subjective basis, we are looking in terms of where a lot of growth is. For instance, we have Nestle SA in the portfolio. That has to do with the core position in the fund, and then we manage the country and company weights around it by buying either Cadbury Plc or another company to balance it. Q:  What risks do you view in the portfolio and how do you manage them? A : We try to manage the risks in two ways. One is by keeping a balance in the account and diversification. We try to keep the balance by country and industry. And the other is by investing in quality companies and in stable and growing countries. We are conscious of trading volumes when we buy or sell. We are contrarian in the sense we try to avoid paying too much for a specific stock and that strict price discipline has helped us limit our downside risk.