Q: What is your investment philosophy in discovering value in the market? A: The affiliated fund was originally conceived as fund seeking safe investments. The fund was managed for the safety of investment and capturing dividend yields. Over the years it has become large cap value fund where we invest in companies with market cap higher than $8 billion. The orientation is for valuation where we screen for value using different screens and then research on these stocks to look for better performance. The fund has evolved to become less reliant on dividend yield and safety and it has more balanced view of the performance and growth but relies on the methodology of value investing. Our philosophy is based on the fact that the market undervalues groups of stocks consistently and we are able to identify these stocks through our research and investment screen and we have the discipline to buy them and wait for the valuations to reflect the fundamental performance. We believe that our research approach and proprietary screening will allow us to out perform the market over the long term in the large cap sector. We are looking for a value with the catalysts or some dynamics that will allow these companies to improve financial performance and will drive the growth in the earnings. We hope to recognize this before the market recognizes. Q: Do the fund track any index and how do fund holdings differ from the index holdings? A: The fund tracks the Russell 1000 value and Barra index. Our weighted average market cap is $50 B vs. Russell 1000 value index has about $57 B. The portfolio is very close to market cap size as in the index. Our median $15 B in the market cap whereas for the Russell it is down to $3 B. We look at the benchmarks and try to keep our industry holdings in line with the indexes. Our holdings are not equal weighted in the portfolio. We believe to outperform the market one has to under or overweight the index weightings. Our investment style is seeking style purity. Our mission is to out perform the two indexes and do that with minimal of risk. Q: What is your investment process? What kind of stock screens do you use and what is your fundamental research process? A: We start with the investment screening process and screen through several different models using the largest 750 stocks. Our goal is to end up with stocks that are cheapest large cap stocks using the dividend discounted earnings using the normalized or mid point of the cycle earnings. We do not use the reported earnings only. The benefit of this is that it takes away the abnormalities associated with the business cycle and its impact on the earnings and it gives us the better view of the long-term earnings power of the company. In addition to this we also look at the price to sales and price to book value. This screen allows us to focus on three hundred stocks with valuation that we like. In this group of stocks you have stocks we like to invest, dead investment and value traps. We will select the stocks that meet our valuation and fundamental criteria, especially stocks with improving fundamentals. Our analysts will talk to the management, suppliers and customers to gain additional perspective on the company and the business. We pay a close attention to what the insiders are doing with their investments. These people are closer to the company and they have a better feel for the company. When we apply this screen to selected stocks it will narrow the list even further. We are looking for catalysts that will result in an improved outlook in the next six to 12 months. Once we have selected the stock to include in the portfolio, based on the risk parameters for each of the companies we decide how much risk we want to take and assign allocation to the stock. Q: What are your views on the economic cycles and how do you use this cycles to your advantage? A: The portfolio is built from the bottoms up. More stocks we find in an area or a sector we believe that have catalysts that will improve the business fundamentals, we generally look for more stocks. We are always looking at the economic cycles and we are always aware of the companies’ sensitivity to the economic cycle. We are also investment benchmark sensitive and we are aware of which stocks we are competing against included both the Barra and Russell value index. We are willing to wait for the combination of valuation and fundamental factors to decide how much of the company stocks shall be in the portfolio. Because of our stock selection process we were able to identify stocks in the years 2002 and 2003 that could benefit from the economic upswing in the 2004 and 2005. This process led us to buy stocks that would benefit from the improving economic climate. We started to buy these stocks before the market focused on them and we had a stock portfolio ready in technology, industrials, and consumer durables and material sectors. Q: Can we discuss some of your winners? A: One of the stocks that have investment community’s attention right now is Apple computer. We have been involved with the Apple story for more than two years when the stock was down to $14 - $15. Based on our research methodology we looked at the normalized earnings and we believed that the company’s earnings would be higher than $1 to $1.15. Analysts at time were cutting the estimates. When we looked at the balance sheet we found the company had $12 per share in the net cash. So we were paying $3 incremental to buy the entire company. The company is a niche player and has a targeted customer base but the investment community was worried of the competition with Microsoft. The company was about to launch upgrade cycle with the hardware and software. The hardware functionality upgrade had the positive effect on the cash and earnings. Apple was earnings while the PC manufacturers were loosing money. Apple reinvested the part of the earnings to develop new products such as iPod and iTunes. Apple was attempting to broaden product and customer base. This was the catalyst we were looking for. Apple was able to broaden its customer base without relying on the Microsoft. Apple also started to open, selectively, stores to educate the customer base about Apple products. Here is the company that had new product cycle that had weathered the tech spending downturn cycle and their earnings and cash positions were still in the desirable range and had the healthy balance sheet. We took the stock that had been flagged in our screens and we carried out the fundamental research and developed company insights. Our investors benefited from this process. Q: An investment is not a profit or loss unless the stock is sold. What is your sell discipline? A: Because we are value investor we are always paying attention to the stock valuations. If the stock valuation rises above the valuation based on normalized earnings, we sell the stock. Stock price is a very significant part of the discipline. Additionally, if the company does not live up to its promises or expectations that we have built or the company’s business outlook changes than we sell the stock and whenever the investment position gets too large in the fund we will trim the holdings so that one stock does not affect the performance of the entire fund. Q: Large cap sector has witnessed several scandals in the last three years. How do you protect fund investors from these scandals? Tells us about some of your experiences. A: For example we had stocks that have been in the media and Tyco was one such company. During the due diligence we discovered facts that we were not comfortable with. While looking at the footnotes in the SEC filings we had learned several details on the company’s expenses and compensation plans. We thought that these items were not in the best interest of the company and shareholders. We were lucky that we sold the stock before the scandal hit the company. We had never owned Enron for similar reasons. We could not understand the complex financing arrangements and we believed that the new economy business model was neither predictable nor sustainable and we thought that the risks of owning the stock were very high. That does not mean that we will not own stock that had problems in the past. We are value investor and even though media is reporting on all the negative stories for its past action there may be an investment opportunity with the restructured company or with new management. What we are interested in analyzing is where the company is heading after the critical and difficult phase and is there a reasonable return to risk ratio in the favor of investors. Q: Can we discuss your investment research process? How does it differ from other funds? A: Our investment research process is bottoms-up analysis and stock picking driven that combines the technical and fundamental research processes. We are looking for companies that meet our valuation and growth criteria. The initial screening process helps us in narrowing to three hundred companies from one thousand companies that we start with. We have team analysts who focus on the fundamental aspects of the business and learn more about the companies, competitors, industry environment. We do talk to management and visit companies. This helps us in keeping current with the companies. Once we have selected companies to invest in we use our technical screens to determine the entry and exit points. We keep up with the our investment and keep learning what is happening with the company and industry. If we see a substantial deterioration in the company fundamentals then we sell the stock. Thank you very much for the opportunity to talk to you.