Q:  What is the history of Montag & Caldwell? A : Montag & Caldwell was founded in Atlanta in 1945. Currently, we manage about $14 billion for clients with 48 employees. The company offers three mutual funds – Large Cap Growth, Mid Cap Growth and Balanced, with about 90% of the assets under management in the Large Cap Growth Fund. The ASTON/Montag & Caldwell Growth Mutual Fund was launched on November 2, 1994. We are now 100% employee owned after we acquired the company from France-based BNP Paribas SA. Q:  What are the main principles that constitute your investment philosophy? A : Our goal is to own a portfolio of high quality companies that have the ability to grow earnings over the next ten years by 10% a year or more and are reasonably valued. With above average near term earnings momentum, these stocks should perform well in most markets. Q:  Would you describe your investment strategy? A : The ASTON/Montag & Caldwell Growth Fund invests in high-quality growth companies that are growing near-term earnings faster than the market and trading at a discount to their intrinsic value. We have a bias toward owning higher-quality names. We quantify quality by scoring stocks using an 11-factor model on such factors as historical sustained earnings growth rates, low leverage, higher profitability, and a couple of accounting quality criteria. Then, we use this score along with measures of earnings stability, size and trading liquidity to assign a discount rate for each company. This discount rate is used to compute a present value of future earnings and dividends for each stock, projecting both forward over a ten year time frame. We consider buying a stock when it trades at a 10% to 25% discount to our estimate of its current value. In addition, we look for companies that are likely to generate above average earnings momentum in the next two quarters. Because we forecast earnings growth rates for such a long period into the future, we have more confidence in larger companies because they have demonstrated the ability to manage through different economic cycles, have multiple products, and frequently operate in several different geographies. In other words, we are looking for a track record of historical earnings growth with the potential for above average secular growth rather than strictly cyclical growth opportunities. We do limit the maximum long term growth rate that we attach to any company to 20% for risk control reasons. Q:  What are some of the analytical steps that your research process involves? A : Our research process is focused on selecting companies that meet our size criteria, our quality rankings, our estimate of secular growth and have a near term earnings momentum. We have a team of six analysts who focus on stock selection. Their job is to identify stocks in their covered universe by industry and sector that are trading at attractive prices, which means having at least 10% discount to their target prices. Moreover, these companies have to be in the top-half of a universe of large cap stocks in terms of near term earnings momentum for the next two quarters. Once the analysts identify stocks in their coverage universe, they write a report and present it to our Investment Policy Committee of eleven portfolio managers chaired by our Chief Investment Officer, Ronald Canakaris. Discussion on the recommendation involves the assumptions that the analysts are making on earnings expectations, both near term and longer term. The calculation of discount rate is mechanical, but is subject to discussion. We can use more cyclical stocks, focusing on where the business is in the economic cycle and how the company has done in the past in different economic scenarios by normalizing its current earnings. For us, a thorough understanding of the range of secular growth scenarios is a key to our selection process. We are also interested in learning what earnings drivers will apply to near term earnings momentum, and how the company might be affected by industry dynamics and macroeconomic factors. Large companies do not usually accelerate into a secular growth pattern. They generally maintain historic growth rates or slowly decelerate depending on the economic scenarios and product cycles involved. Again, we evaluate long enough periods and take into account how the company performed under different conditions to gain a greater confidence in the growth number that we attach to each stock. Our methodology focuses on managing a portfolio of 30 to 40 names where we have enough confidence in their secular growth rates and near term earnings momentum. Q:  Could you give an example to illustrate your research process? A : Schlumberger Limited, the oilfield services company, was a name that we bought in 2001 and we have owned it ever since. That followed a period of twenty years where oil exploration activity was at a very low level. As a result of increasing demand, this long period of lower activity that produced what we thought were opportunities in the oil service area. Schlumberger, the largest oil services company in their industry and with a worldwide presence, also was in solid financial shape but had made acquisitions in unrelated areas. A decade ago Schlumberger made a management change that triggered our attention because it increased the likelihood of releasing its underlying value. It is a cyclical company in that the demand for their services is dependent on oil exploration activity which is generally tied to the energy price activity. They have a longer-term advantage in that many large energy field discoveries were made when prices were higher back in the 1970s. With the increased likelihood of improved demand in the emerging economies, many of these fields were deteriorating and close to exhaustion in North American and worldwide. We thought Schlumberger was financially sound and had a lot of growth opportunity ahead of it, as oil exploration companies ramped up their exploration to replace ageing fields. For these reasons we have also had an overweight position in the oil service and energy component of the portfolio relative to our benchmark for most of the last decade. Q:  Would you share another example? A : The Coca-Cola Company is a classic, long term, above average growth beverage maker and is now enjoying strong growth in emerging markets. And, last year the company bought its largest bottler as it expands its focus from the carbonated beverages to non-carbonated and other beverages in its domestic market. While Coca-Cola has expanded its distribution and branding to markets worldwide, it remains focused in making and distributing beverages unlike PepsiCo, Inc, which has diversified into snack foods and other food products. For Coca-Cola the real growth opportunities are raising the consumption of their liquid refreshment which is carbonated and non-carbonated beverages worldwide, particularly in the emerging markets. This is a business that generates lots of free cash flow, giving the company enormous financial flexibility. We owned the stock for a most of the 90s, and repurchased it 2003 after the company had gone through several chief executives. In the last decade, the company has improved its management strategy to take advantage of its market position and growth opportunities. We like Coca-Cola because beverage consumption continues to rise around the world and the company leads in that market. Also, the company has an excellent track record in increasing its dividend which is very important to us. The company also has the balance sheet to fund growth opportunities in the emerging markets and not dependent on the financial markets. We chose Coca-Cola for its inherent growth record and brand recognition and ability to translate that into above average growth in the future. The company had wandered off in many other businesses in the seventies but finally got its focus back to its core beverage business in the last two decades. Moreover, we felt here is a company that has been in business for well over hundred years and still has the ability to grow at 10% or more a year for many years to come because it can penetrate attractive emerging markets. Q:  How do you build your portfolio? A : We diversify among 30 to 40 stocks. This may appear to be a smaller figure compared most other funds, but we are comfortable with this number of stocks that are well researched and well understood by us. The average position size in the portfolio is 3% and usually we start with a 1% position and restrict to 7% maximum. In terms of turnover in the portfolio, we tend to add eight to ten new names per year with a calculated turnover rate of 40% to 50% on average. Our turnover in number of positions is much smaller because we tend to hold them for many years as long as the secular growth opportunity is intact. We are measured against the Russell 1000 Growth Index. Although we use this index for benchmarking purposes, we remain benchmark agnostic. Q:  How do you define your sell discipline? A : Our sell discipline is based on comparing a stock’s current price to our target price. At a premium of 20% to the target we sell. With an earnings miss, we evaluate the situation around each stock and decide if our investment thesis still holds. We would then either sell or buy more. For instance, we bought Monsanto Company in 2010. We set $90 as the target price based on our work and the stock traded in the $70s. Therefore, it met our price criteria and we held the stock for two quarters. But, they were two disappointing quarters. We then sold the stock, and this year we bought it back after the company regained the control of its business model, stopped losing market share and we were able to predict earnings with more certainty. Q:  What kinds of risk do you focus on? How do you manage risk in the portfolio? A : We do not let the portfolio get too concentrated in one particular area, which has helped to moderate the volatility. We monitor our sector exposure and limit sector holdings to no more than two-and-a-half times the broad market S&P 500 index sector weightings. We also limit holdings in individual stocks. In the fund prospectus, our stated maximum is 7%, but effectively when a stock gets above 5% of the portfolio value, we will trim it back. That is strictly from a risk control point of view.