Q:  What is the history of the company and the fund?   A : Crawford Investment Counsel was founded in 1980.  We are an independent and employee-owned investment management boutique firm located in Atlanta, Georgia. We have twenty-six employees including an equity research team of eight investment professionals. Currently, we manage about $2.6 billion in assets.   We have been servicing individual and institutional investors for almost three decades.  In addition to our mutual fund, we separately manage equity and fixed income accounts.   The Crawford Dividend Growth Fund was established in 2004, however Crawford Investment Counsel has employed its Consistent Dividend Growth strategy since 1980.  The investment objective of the Dividend Growth Fund is to provide attractive long-term returns while protecting capital in down markets.   Q:  What core principles guide your investment philosophy?   A : Our primary focus is on undervalued, high quality companies with strong balance sheets. We look for companies with an attractive combination of dividend yield, dividend growth, and valuation. We believe high-quality stocks purchased at an attractive valuation leads to superior risk-adjusted return over the long term.  We are convinced that dividends are a superior way to measure quality and consistency. Companies that are able to pay and grow their dividend tend to have attractive cash flows and financial strength.  Dividends reflect a company’s confidence in the future of their business.   Q:  How do you convert your investment philosophy into a consistent investment strategy?   A : There are a couple of ways to answer this question.   First, our investment process has historically provided capital protection in difficult markets and a pattern of returns that has exhibited less volatility or more consistency than the appropriate indexes and our peers.  This consistency of returns is due to our focus on undervalued, high quality companies with strong balance sheets.   We also take great pride in the consistent application of our investment strategy.  We have been investing for almost 30 years in undervalued, high quality companies that grow their dividends.  Dividends are not a fad for us.  Our research team has an average tenure of 14 years at the firm, which is vitally important to the consistent application of our investment strategy.   Q:  What are the analytical steps in your research process?   A : We start our investment process by identifying all U.S. exchange-traded companies that have paid dividends and increased their dividends over a ten-year period.  The stocks must also meet certain trading volume requirements.  Currently, about 400 high-quality companies meet this criterion.   There are eight analysts on our research team and we work together to monitor the stocks that are in our universe. Industry responsibility is divided among the analysts with each analyst researching and monitoring stocks in their assigned sectors. Every stock is rated based on fundamentals, valuation, and its overall merits. Analysts present buy recommendations to the investment team at the twice weekly meetings. The full investment team as a group conducts further research and ultimately votes on recommendations for inclusion of the stock in the portfolio.   Existing holdings are consistently reviewed at the research meetings. Analysts monitor the holdings in their sectors and communicate with the entire research team. All investment decisions are made by the investment team.   Q:  Could you illustrate your buy-and-sell discipline with a few examples?   A : We sell a stock if it becomes overvalued, if fundamentals deteriorate, if there is negative dividend action, or for diversification reasons.   For example, a holding that we no longer have in the fund is Bank of America Corp., which we purchased in January 2004. At the time of purchase, Bank of America had a predominant position in the marketplace with very attractive fundamentals based on the business. The stock’s valuation was appealing and the dividend yield was generous. As a whole, it was a combination of attractive fundamentals and valuation which led us to purchase the shares.   We sold Bank of America in November 2007. It was a successful holding for the fund over that time period. It was the continuation of our fundamental research which led us to sell Bank of America as business conditions changed.   The research team evaluated past credit cycles, and it was pretty easy to determine that once credit started to deteriorate, Bank of America would have exposure to those credit problems. Therefore, we elected to sell the stock even though the valuation remained modestly appealing and the dividend yield at that time was attractive. We felt that the fundamentals were moving against Bank of America and we were better served to sell the shares which we did in November 2007.   Another name previously held in our portfolio was Colgate-Palmolive, which we owned for a period of four years. The reason for buying Colgate was its consistency of earnings and the growth profile of their opportunities in the international markets. We believed Colgate offered more attractive growth than other consumer staples, while not priced at a premium valuation for the additional growth.   Colgate performed very well relative to the weak market environment in 2008 and early 2009. While we had no problem with Colgate’s underlying business, we felt the valuation on Colgate relative to other investment opportunities was not justified. We sold the stock in mid 2009 due to overvaluation.   Q:  Do macroeconomic events play a major role in your investment process?   A : Even though we are a bottom-up stock picker, our belief is that investment managers need to be aware of the macroeconomic trends and also have a view on the macroeconomic outlook because it will influence the fundamentals and the growth potential of businesses. We attribute 80% of our effort to bottom-up research and 20% to top-down research.   Q:  Do you prepare any investment models?   A : Yes, we typically run discounted cash flow models to help determine what a stock is worth.  Our goal is to purchase a stock at a price that is below its intrinsic value, based on very conservative assumptions.   We also look at a variety of other valuation measures including price-to-sales, price-to-earnings, dividend yield, etc.  This analysis is conducted for each company relative to its own history, its industry and the overall market.      Q:  How do you do your portfolio construction?   A : The research team conducts the fundamental research and creates a portfolio that in aggregate has below market price-to-earnings ratio, above market dividend yield, above market dividend growth and below market earnings variation.  All investment decisions are made by the investment team.   We construct a portfolio of 30 to 35 names with equal weighted positions at the time of purchase. Our economic sector representation will vary based on where we are finding attractive value.   The portfolio remains fully invested and diversified across economic sectors.  Individual holdings are limited to 5% of the portfolio’s value.  Sector weights may not exceed the greater of 25% or two times the weighting in the S&P 500.   Average portfolio turnover is between 25% and 30% a year. The benchmarks that are commonly used for our fund are the Russell 1000 Value Index as well as the S&P 500 Index   Q:  What are the risks perceived in the portfolio and how do you mitigate them?   A : The risk in any portfolio comes from exposure to specific stocks, sectors and the overall market.  We mitigate some of the potential risks by equal weighting stocks at the time of purchase to make sure we have sufficient diversification. We also have the above mentioned sector constraints.    Our main risk control is the investment characteristics of the companies.  The overall portfolio consists of high quality companies with attractive dividend yields and dividend growth, consistent and growing earnings, and attractive valuations.  These characteristics produce a risk profile that has been significantly lower than the market and most of our peers.   Q:  What lessons have you learned from the unusual macroeconomic environment of the last two years to improve your investment strategy?   A : I think that the last two years have in effect validated our investment strategy. While 2008 was a very difficult year, our portfolio declined significantly less than the market and almost all of our peers.  Fundamental research is an important component to the process and it protected the fund’s value.  Our emphasis on fundamental research rather than just purchasing the highest dividend paying stocks allowed the portfolio to better navigate the challenges of the financial markets.    In our view, downside protection is critical.  It is one of the more important characteristics of our portfolio. Our belief is that most investors underestimate the damage of negative returns to long-term performance. One bear market can wipe out the returns of several bull markets.  A lot of investors fail to realize that a portfolio that dropped 50% in value must go up 100% to break even.    Going forward, we are expecting an environment of slow economic growth over the next few years.  I believe companies which have significant market share, strong balance sheets, and predictable and consistent earnings and dividends should perform relatively well.