Q:  What is the history of the company and the fund? A : The Edgewood Growth Retail Fund was launched on February 28, 2006. We are a privately held firm with six investment professionals supported by two research analysts. We have one investment model and, basically, all the different assets are run under this one model. The firm has about $7 billion in assets under management. Q:  What core beliefs guide your investment philosophy? A : Our goal is to produce sustainable long-term performance by investing in high-quality growth companies. By quality I mean companies that are leaders in their markets and have strong balance sheet and stable and predictable earnings. Our investment philosophy is grounded in the conviction that earnings growth will drive stock prices over the long term. This is the foundation for our high-quality, low-risk approach to investing. Q:  How do you convert your investment philosophy into an investment strategy? A : The fund seeks to pursue long-term capital growth through a portfolio of 22 stocks of predominantly large companies that are distinguished by their financial strength, high levels of profitability, strong management and ability to consistently deliver long-term annual earnings growth of more than 20%. We purchase companies trading at substantial discounts to our estimate of intrinsic value and believe that, over time, the stock prices of companies will rise to reflect the value of the underlying earnings power. Q:  What is your research process? A : We have a watch list of between 75 and 85 companies that we’re tracking. We view ourselves as buyers of business and not of stocks. We are searching for companies that have track record of sales and earnings growth and are trading at substantial discounts to their fair market value. Essentially, we are looking for companies that are in the early profit cycle and are expected to benefit from rising free cash flows. There are three ways we search for companies. First of all, our regular weekly investment screens based on our proprietary metrics help us to locate companies that have financial strength and track records and quality of earnings that we like. Second, we look for companies based on demographic, economic or investment themes. We are looking for companies that are leaders in their fields and have sustainable competitive advantages. Third, we are looking for companies that have been spun off from larger conglomerate or companies. These businesses generally have new freedom and access to capital that could unleash new energies in management and business growths. We also focus on companies that have been merged and are likely to benefit from the synergies in sales, consolidate operations and expand product portfolios. We employ a disciplined discount to present value ranking system utilizing fundamental research, with a focus on balance sheet analysis. Based on the conviction of our proprietary analysis, we take significant positions in securities that we believe are our best ideas and hold them for the long term. We spend a lot of time understanding what the intrinsic value of a company is. The estimate of the intrinsic value requires us to understand the company’s market, its competitive dynamics and management quality. Our comprehensive review of the company and industry guides us to develop a holistic picture of the company’s past and its future prospects. Our analytical process is designed to be repeatable and we assigned companies that we like to research or track to one of the portfolio managers. We build our investment models and learn sensitivities to various business parameters. We also talk to analysts on Wall Street and other independent researchers to understand their views on these companies. If the company passes a cursory screen, the analyst will bring it to the investment committee and then with the help of our industry contacts we will develop industry insights and form a view on the management. We then visit the company and meet the management team and gauge if they are trustworthy and dependable. Once a company passes all the screens and is identified as a potential candidate in the portfolio it will be presented to our investment committee. The committee debates the investment merits of various candidates and only those companies that get unanimous approval are selected for the portfolio. Based on the investment team’s fundamental analysis of a company’s profit cycle and using a five-year discount to present value model, portfolio holdings evolve through three phases. The first phase is where investments are in the early part of their profit cycle and will warrant a more sizable weighting once their profit cycle begins to grow. The second phase is investments are companies that are increased to a larger weighting due to the relative attractiveness of their valuation in addition to the company moving through the strongest part of its profit cycle. And the third phase is where investments are companies that are reduced because they are nearing the team’s estimate of full valuation or their profit cycle has begun to deteriorate. Every day, we are evaluating every position. When a new holding is introduced to the universe, it forces the team to challenge the conviction level of all of the existing stocks in the portfolio. Portfolio construction is strictly defined at 22 companies with insistence that a name to be added, another name must be sold. The committee meets formally once a week and informally on a daily basis. Q:  Why do you prefer a team-based approach? A : My belief is that the team approach is the best because the team dynamic is such that we want to continually impress the people we work with. We want to be doing the most thorough work we can as we are associated with smarter people who ask tough questions and are very selective. Another factor is every portfolio manager is responsible for his stocks. The competitive nature of our team encourages each team member to excel at their selection and naturally want more of his selection presented to the committee included in the portfolio. The other thing that is important here is we’re compensated. We are all paid based on a percentage ownership of the firm and so if the firm does well, we do well. So they are incented to make sure the firm is doing the best that it possibly can and that's through putting in ideas and servicing clients. Q:  Can you give some historical examples to illustrate the steps of your research process? A : I will take an example of a company that we don’t own now but in which we had a stake back in 2006. The company is Intuitive Surgical, Inc., a corporation that manufactures robotic surgical systems, most notably the da Vinci Surgical System. We do a lot of work at the hospital level because we've got investments in healthcare and we had noticed that Intuitive had gotten approval to do prostatectomy and hysterectomies using their da Vinci Robotic System. We went to two different hospitals and watched the da Vinci work. We got feedback from doctors who felt it's clearly a better way to do these two procedures. We built models on how big the market could be and what this could mean to them and we decided to buy at around $125 a share. It rose quite quickly in three months up to $275 a share and we sold very quickly because it hit our price target. Another example of something that didn’t work out quite as well is Electronic Arts. It is a publisher and distributor of video games. Towards the end of last year, a new management had come in who made a number of changes. The gaming market had been growing quite rapidly and they had many ways to generate revenues besides just selling games. They were doing in-game advertising and taking the games and importing them to portable devices. There were many other new revenues streams that were not built into people's models and we felt it was possible that this franchise would be worth a lot more to somebody else that it was trading in the marketplace. At that time, it was about $17 a share. But a year later, we sold Electronic Arts. The business changed quite significantly over the last twelve months. There has been a crowding out of video game time by other things, be it cell phones or online gaming, video gaming, or playing on the iPhone. Things were going much more slowly than we had thought and on top of that, the price cuts in video game consoles did not translate into a significant growth in video game console sales. And when we did not see things happening as we had expected, there was a major change in industry fundamentals. The committee decided to sell the stock. Q:  How do you do your portfolio construction? A : We employ a bottom-up investment process to construct a portfolio of large-cap growth companies. The investment team looks for potential investments where it can find growth regardless of the sector or industry. However, we do limit our position in any single name to 8% and to 25% in a specific industry. Our portfolio typically has moderate turnover and long holding periods. Normally, we start at a 2% or 3% position. We want to go several quarters with the investment to make sure that management is being honest with us and we have good access. And as we begin to get more confident in the management team and the valuation supports it, we'll then begin to increase our exposure. If it turn out that this is not what we thought then we could move it out or just keep it the same. So there is a constant process of not just replacing names in the portfolio, which happens about four or five new names a year. But there is a constant process of reallocating capital based on where we think the best risk/reward return is. We also will divide the portfolio across growth rates and have about a third of the portfolio in the 10% to 15% growth, another section in the 15% to 20% growth and then we’ll have another section of the portfolio where the growth is above that and we try to blend the earnings and valuation of the portfolio across industries. So we end up somewhere in the 18% to 20% growth rate at the portfolio level. The fund's performance is typically benchmarked against the Russell 1000 Growth Index over a full-market cycle but currently the S&P 500 Growth Index is the benchmark. The benchmark is just a reference. We really don’t look at the weightings in the benchmark. We are stock pickers and the benchmark doesn’t really affect what we do on a day-to-day basis. We have 22 holdings in our portfolio and we consider that is sufficient diversification. The more important issue is that we have to sell something to buy something and it keeps us really focused on all the companies in the portfolio both on an operational and valuation basis. If stocks appreciate very quickly then we want to sell it because we've got other stocks that we want to add to the portfolio. The portfolio turnover is about 40% plus a year. It's 20% in new names and 20% in rebalancing and that can vary depending on the year. Last year was much higher because of the volatility in the market. Some years are lower depending on what the market is. So really it's market dependent. We don’t hold cash in the portfolio. If we sell a stock we replace it with a better idea. We are not looking to hold cash in the fund as we are always fully invested. We do keep less than 3% cash to take care of redemptions or rebalancing in the portfolio. Q:  What is your sell discipline? A : We adhere to a strict sell discipline in which primary coverage of a company is reassigned from the original portfolio manager to another one of the partners when one of the following events is triggered, namely a stock is down relative to industry peers, or two consecutive quarters of earnings disappointments, or a major change in the company or the industry fundamentals. Once triggered, coverage is reassigned and the stock is reassessed. The original analyst stays on the committee as an information resource but does not have a vote on the outcome. The committee in such cases discusses the new analyst’s findings and decides whether we should take advantage of the decline by instituting one of three actions: buy more, sell what we have, or just hold on to what we have. Q:  What are your views on risk and how do you manage it? A : We try to manage risk all throughout the firm starting with the way we pay the partners so that they are all incented to make sure that every investor in our firm is doing well. We look at risk from a compliance perspective making sure that we're in compliance with all the rules. We take into account compliance, trading, and the way the business is set up as the first and most important way to control risk. Then, there is portfolio risk and we try to diversify across industries. We then try to diversify by company investment which is our next risk and then we have two other levels of risk management. The first is on valuation. We want to make sure that we're paying very strict attention to what we are buying and paying for it and the other way to control risk is to buy quality companies. The most important risk management tool is research. This means visiting companies and spending a lot of time on meeting with management teams and making sure we've got the research correct.