Q:  What is the history of the firm? A : James Investment Research Inc. was founded in 1972 by Dr. Frank James. The firm is a financial investment advisory firm, headquartered in Alpha, Ohio, which caters to corporations, foundations, hospitals, financial institutions, and private investors. The James Small Cap Fund was launched on October 2, 1998 and currently has about $81.5 million in assets. Q:  How would you define your investment philosophy? A : Our focus is on “relative strength”, meaning stocks that have been beating the market over extended periods generally continue to beat the market, and if stocks have been underperforming the market, they will continue to underperform the market. We generally look at everything from the direction of the market to individual securities. The core belief is that while monitoring securities we are looking for bargain stocks, or in other words stocks with good relative valuation and profitability. For us, investing in a good bargain means being able to stay with it as long as it remains a bargain. Q:  Why would you recommend investing in small cap stocks and what do you consider small cap? A : First of all, small caps are a great place to invest because long-term data show that small cap stocks outperform large stocks, even though the ride can be volatile. Moreover, the type of investing that we find appealing is bargain stocks, which tend to work much better on smaller stocks than larger stocks. Our definition of a small cap stock matches the convention of the Russell 2000 Index, being no larger than an index constituent and going all the way down to about $250 million. The largest stock today in the Russell 2000 would be about $3 billion in market cap. Q:  How do you transform your philosophy into the fund’s investment strategy? A : We use fundamental analysis as well as our computing resources to search for small companies that meet our criteria. Our model provides us a database of over 8,000 stocks where we search to identify those with the strongest combination of value, neglect and management confidence traits. Still, our universe generally comprises between 2,000 and 2,300 stocks that we will eventually rank from one to 100 based on factors that are important to us. Generally speaking, we want these stocks to be probably in the best 20% of this group on most of the factors. We then select from the best ranked stocks that meet our small-cap definition. We have also developed computer programs to remind us that certain stocks are no longer bargains and to inform us that particular sectors appear to be out of balance. Since we know how important brokers are in the world of small cap investing, once every three months we review the execution ability of our different brokers. Additionally, we are constantly striving to make sure that we do not have any issues such as ownership. We purposely limit ourselves to owning no more than 7% of a company. We do not use a strategy that looks at price targets. Instead, we continually check if the stock makes sense at its current valuations, profitability and relative strength factor. Moreover, we look at each one of these stocks on a regular basis to assess if a stock is still worth holding on to or calls for getting out. Q:  How do you evaluate an investment opportunity? A : The first step begins with a very quantitative approach wherein we try to identify factors that would do well for a stock in the future. We try to look at that on a risk-adjusted basis. Other financial metrics that we delve in include: price-to-earnings, price-to-cash, price-to-sales, and good profitability measured by historical earnings growth, return on assets, cash flow from operations and long-term relative strength. Our scrutiny of a company’s management focuses on what they are doing, such as how they are dealing with their accounts payable, and what their shares buyback program is. We do not usually contact management to try to get an opinion from them, as we have found that they typically cannot give us any information that that will not already be in the public domain. From all this, we have created about forty different factors, which helps us rank each stock on a basis of one to 100, where one is the very best and 100 stands for the most expensive type of stock. Focusing on stocks that are in the top 10% gives us a rough estimate of the names that are going to be bargain stocks. Then we start digging deeper to see if the numbers are real and make sense, what the business model is like and whether it fits with our expectations. We like to see good organic growth in companies. High levels of acquisitions are usually a red flag to us. Q:  Can you give some historical examples of companies that illustrate your research process? A : One of the stocks that we have in our portfolio is IDACORP, Inc., an electricity holding company. This stock was first purchased back in the middle of 2010 and we continue to have it in our portfolio. In our screening process, the company not only shows up in the top 10, but it also has a 3% yield and its earnings have been growing at 22%. IDACORP has a relative strength of 108, which means that it has done about 8% better than the market over an extended period. We started paying attention to this company because of the strength and quality of their earnings. They had a lot of impressive qualities in management that we liked and showed a lot more flexibility. What is more, they had good relative value. Power is one bill that generally gets paid under any circumstance as people need power for their homes. This was another factor that contributed to our outlook and led to investing in the company. Another holding that we have in our portfolio but we are looking to sell right now is Canada-based CGI Group Inc. It is an information technology management and business process services company. The stock has done quite well for us. It was one of the very top-ranked stocks and even today it continues to be in our top 10%. When we bought this stock in the summer of 2008 it was trading near $10 a share and today it is around $22. In addition, it had good earnings and relative strength. We have been very concerned with the course of the dollar and we see the technology sector as the number one sector affected by the currency’s direction. We felt that the situation in Canada seemed to be better than what was in the U.S., so for that reason we started buying into the stock. Also, we want to remain in the small cap stocks in the portfolio and this name is trading well above what we consider to be acceptable market cap. It has grown to over $4 billion in size, so for that reason we are thinking of selling it. Q:  When do you decide to sell a stock? A : We will trim a stock if it gets to be more than 6% of the portfolio and if it gets to be much larger than what is in the Russell 2000 Index. We will update our model situation that ranks every stock on the basis of one to 100 about three times a month and if a stock has fallen out of that top 20%, it becomes an automatic review for sale. Our portfolio turnover is about 38%, so stocks tend to stay in our portfolio for about two years or more. But, we need to continually monitor to see if the stock makes sense or if we need to go ahead and start to move out of that stock, so that we can invest into something that might be more of a bargain in the future. Q:  How has your ranking system helped in discovering stocks? A : We do not expect any one stock to be perfect. As we evaluate as stock’s price-to-earnings, price-to-book and price-to-cash ratios, we will also look at the number of analysts that are following the, the ownership of the company, their financial discipline and debt levels. Based on the research that we have been doing since the 1980s, our ranking system has consistently helped us in weighting all these different factors across the whole spectrum of our rankings. Q:  What types of risk do you focus on and how do you control them? A : The one risk that we are concerned about is downside capture. Overall, we want to have good capital preservation. We try to give up a little bit of the growth opportunities to have more protection on the downside, which resonates with our investment philosophy.