Q:  Would you give us a very brief overview of the company? A : Rochdale Investment Management is a private investment management firm managing both private individual accounts and proprietary mutual funds. We currently have about $2.5 billion* in assets under management. I manage the dividend and income strategy but the Firm also manages other equity investments, fixed income investments, and some international investments. We provide a personalized approach to each client so that we have a strong understanding of their return need, based on their liquidity and risk tolerance. At present, about 30% of our assets under management are invested in the dividend and income strategy. I have roughly 17 years of experience in the financial services sector of which the first four years were with Merrill Lynch and Paine Webber. The last 13 years of my professional life have been with Rochdale. Q:  What is your investment goal? A : The primary investment goal is to provide attractive and recurring income with an aim towards providing long-term capital appreciation as well. As the name suggests, a significant portion of the income comes from dividend income but we can also invest in fixed income securities. Generally the Fund invests most of its assets in dividend paying securities. We may invest up to 25% of assets in foreign dividend and income generating securities, including those of the emerging markets. Also the Fund can invest in both investment grade and non-investment grade bonds. Essentially, we are looking to get an attractive total return in the equity market with a good portion of that return coming from the actual dividend and the growth in the dividend. We are also looking to experience less volatility as we aim for those returns. So, overall this fund is for those investors who are seeking an attractive and steady cash flow from dividends with a goal of experiencing less volatility than the broader equity markets and are willing to accept more risk than fixed income investments. So our focus will be on stocks of companies that have an attractive valuation, pay a relatively high dividend, and have the capability to grow their dividends in the future. As an exception to the rule, we may sometimes look at some companies that are generating great cash flow but that are not paying dividends currently. These companies would have the inherent strength in their fundamentals to do so at a later stage. Q:  What is your research process and how do you pick stocks? A : The research process starts with screening of stocks that have an attractive valuation and an attractive yield. Our main focus is on stocks in the Russell 3000 index but we also look at other high yielding securities, foreign stocks and preferred stocks as well. So, quantitatively we are screening for stocks that reach certain criteria in dividend yield and valuation. The second step, which is a differentiator between us and many other dividend and income strategies, is our fundamental research process. We roll up our sleeves and conduct a thorough, “bottoms up” research analysis to see whether the companies we invest in have fundamentals that are strong and the cash flows that can support a solid dividend and growth in the dividend over time. When we determine whether a company can maintain their dividend, we look at things like their balance sheet, debt levels and when those debts are becoming due, the cash flow, the business franchise, and payout levels. We also look at the sector of the business especially with respect to its recession resistant characteristics. We also look at the quality of management and their commitment towards payment of the dividend. The final step, which we feel is very important for long-term growth and capital appreciation, is to look for companies that can increase their dividend. This is an important factor that can separate the winners from the losers over time and really impact performance of the portfolio. Overall, it is a three step process of searching for an attractive yield, researching into the maintenance of the dividend, and then assessing the likelihood of an increase in the dividend. Q:  What kinds of dividend do you prefer? A : Our focus is on a recurring cash dividend and not stock dividends or special onetime dividends. So, we focus on good cash generating businesses that can support a recurring cash dividend. We are interested in a dividend rate that has remained stable and has gradually increased over time at a sustainable rate. We may look skeptically at companies that have paid out a very high rate of dividend because in the long run that may not be sustainable. We generally find that companies that have maintained a solid track record in this aspect have come back reasonably well after a period of volatility. Q:  Can you illustrate with a few examples your analysis and then your buy and sell strategy? A : We have the ability to look into any sector and invest into it depending on how well it is doing financially and what the sector’s outlook looks to be. We regularly attend industry conferences to gain a better insight of the factors currently affecting a sector as well as meeting with the companies in such selected sectors. A few years back we had a significant exposure to REITs and when we found these were getting more and more expensive we stopped buying then as the valuations were no longer as attractive. And by the same token we haven’t been interested in banks. We are still not buyers of bank stocks even though they have recovered sufficiently recently, as they still are not able to meet our basic criteria of a solid dividend and the fundamentals for a recurring and growing yield. We have bought back into some selected REITs, especially those that were able to maintain their dividend through the financial crisis. We are also buying into Master Limited Partnerships, especially the natural gas pipeline and propane companies, as we believe they have very good recession resistance features, as well as attractive and steady dividend payments. Proctor & Gamble, Kraft Foods, and Hershey are all blue chip consumer staple sector companies that are generally good buys. These are companies that have solid franchises, so for long-term investors, the market has provided a good opportunity to buy them at attractive valuations. DuPont and BP are examples of cyclical companies that have paid good dividends and could perform well in an improving economy. We have also bought into the very solid franchises like Wal-Mart and McDonald’s even though the yield is not as high as some of our other holdings. These companies have stable earnings and as the economy improves, their performance is likely to as well. Our sell discipline is based on taking gains when a stock has rallied and the valuation is no longer attractive. Alternately, if the stock is down, we focus on the issues that have led to the negative performance to see if our interest would still be there. Q:  What are some of these fundamental criteria that you look at when you buy stocks? A : Since we are a dividend income fund, free cash flow is probably the most important criteria since it will drive the dividend and ultimately the valuation as well. However, if a company has excellent cash flow generation but is not traded at a valuation that makes sense for this strategy, we will likely not be interested. Currently, the average stock yields roughly 5%. So if we are interested in buying into a company with an excellent cash flow and fundamentals but doesn’t pay dividend, we often search for other companies that pay a higher dividend to balance the portfolio. The balance sheet is very important, especially in the present scenario. When you look at certain sectors like REITs, the balance sheet along with other analysis allows us to get a fair idea of the reasonableness of the debt levels, the scheduling of the debt payments, the free cash flow generation, and the availably of lines of credit. In basic terms, the less the debt the better. This is especially true now because of the issues facing the credit markets, although the situation has markedly improved over the last several months. Q:  How many stocks do you have in the Fund? A : It varies roughly between 80 to 100 positions and generally we start with a 0.5% or 1% position. If we like a name very much, we may start with a 2% weighting and this can be increased to about 5%, which is the highest weighting we tend to have. We try to keep a diversified portfolio with an emphasis on capital preservation. By being highly diversified we try to keep individual stock risks to a minimum and try to keep our capital preservation as high as possible. Q:  What is your benchmark index? [ A : Our main internal benchmark is the Dow Jones U.S. Select Dividend Index and we benchmark ourselves everyday against this index. Overall, we compare favorably against this index. We also look at the Russell 2000 Value Index as well as other value oriented equity indexes. Additionally we also look at the S&P 500 index. Being an equity strategy fund, even with the focus on risk aversion and capital preservation, we like to compare ourselves against this index which represents the U.S. stock market in general. Overall, we have performed well against it over time. Q:  Why do you benchmark yourself against the Dow Jones Select Dividend Index? A : This index was started in 2003 generally in response to the growing popularity of dividend investment strategies. The index has 100 stocks ranked by dividend yield that are screened from the Dow Jones U.S Index, with the notable exclusion of all REITs. So essentially, it became a popular index for investors to follow who were interested in a dividend focused equity strategy. As a quantitative index, it does not do the fundamental research that we do to estimate whether a stock can maintain the current dividend as well as increase it. Overall, it is a useful index we use everyday to compare ourselves with. Q:  What are the kinds of risks that you perceive and how do you mitigate them? A : We are very wary of price and capital erosion and volatility in general. We seek to minimize risks starting at the stock level. Each stock is analyzed from the bottom up with a focus on a solid and attractive valuation. There are always times of high market volatility as that is the nature of markets. However, focusing on each stock and the potential risk of each stock helps us mitigate the overall portfolio risk. In addition, there is a lot diversification both by sectors and the number of holdings. We generally do not have more than 25% of the portfolio in any one sector. We also generally do not have more than 5% weighting in any one stock. So, we have a lot of sector diversification and also stock diversification targeting a holding of roughly 100 stocks. When needed, we can also increase the cash allocation. In 2008 the cash weighting was about 15% which, in retrospect, was appropriate. There were times by the year end when it was pushing 20%. Also, we tried to respond to the choppy economy by making a push into the larger cap defensive stocks like McDonald’s and Wal-Mart. There are some stocks that have a steady dividend and attractive valuation, but due to market conditions may face a higher than normal prospect of price erosion. In those cases, we would sell such positions until we felt that the underlying conditions were more appropriate for making a buy and hold investment. Overall, the Fund has maintained a leading capital preservation Lipper rating which is one of the goals we focus on. Q:  Is there any limit to your market cap? A : There is no limit to the market cap. We generally hold a blend of small, mid, and large cap stocks. As the markets became more volatile in 2008 and early 2009 and the economy went into recession, some of the larger cap stocks had more relative attraction than in years’ past. But generally speaking we do not have any constraint on the market cap. In fact, we hold a very large cap stock like Exxon Mobil Corporation, which has been a core holding for many years now. On the other end are many small and mid-sized dividend companies that are not well known names. On average, if you were to blend it all together, we are on the border of a large and mid-cap strategy. But it can vary from the very large to quite small. Q:  As your name suggests your fund is a dividend income portfolio. Apart from dividend income, do you generate income from any other sources as well? A : Currently, the majority of our income is from dividends. We do hold some preferred stocks too. Preferred stocks do not generally have any capital appreciation opportunity but the yields on these securities can be very attractive. If we see some fixed income opportunity that looks attractive, we will consider making that investment. But, generally speaking, it is primarily an equity strategy.