Q: You became lead manager in November 2001, just about the time the stock market decline seriously intensified. Since July of last year, the market, particularly the large-cap sector, has stabilized. Should shareholders worry about the doomsayers' predictions? A: I'm familiar with all their opinions. Before I say what my opinion is, I will say in general, as a value fund manager, almost by definition, I'm basically saying to you I don't know what's going to happen in the future. That's why I'm much more price focused than future focused. As a value investor, the overriding philosophy is, who knows what the future may hold, but if I buy cheaply enough, I should be okay. I don't spend a lot of time worrying about who's right and who's wrong in terms of economic predictions, nor do I spend a lot of time trying to formulate some overarching economic game plan of my own. I'm focused on company fundamentals. You know, it's very hard for someone on the inside of a company, like a CEO to know what the future holds for his company. It's even harder for someone on the outside. Every investor is operating at a bit of a knowledge disadvantage. How are you supposed to make an investment when you can't possibly know everything there is to know about the company, let alone what is going to happen next month? I prefer to focus on the company characteristics and operating fundamentals. Q: Now that you've outlined your investment philosophy, are you bullish on the stocks you have bought on the cheap? A: I'm relatively bullish for my category. Although I'm biased, I think a value investment strategy is a good strategy for uncertain times. You don't know when the next bomb is going off, or what's going to happen on the geopolitical scene, or earnings scene. It's a safe way to play the short term and also a good way to play it in the long term. Q: Value was king as the economy declined. If the economy improves, how will it affect mutual funds in the value category? A: I can build a case where the economy starts to improve late this year and early next year. I see a number of reasons of why one ought to be thinking about a turn in the cycle, among them low absolute interest rates, oil prices most likely declining - that's very bullish - and various tax incentives. Much of corporate America has spent the last three years trimming their labor forces and getting their cost structures in control, paying down their debt, trimming up their capital structures, and basically preparing themselves for the economic turn when and if it ever comes. They ought to be reasonably well positioned should we get an uptick in the economy. Q: What about the weak dollar and its impact on earnings? A: The weaker dollar, although it has negative connotations in terms of our twin deficits, should make the products of large-cap companies, which this fund invests in, more attractive to overseas consumers. I understand the bears' arguments and I wouldn't want to dismiss them, but I feel like longer term a lot of factors are gearing up for a better world ahead. Having said that, I don’t know what's going to happen in the next six months. Your guess is as good as mine. Q: When you talk about a buying a stock at your price, how do you determine it? A: First of all, we look at what the business is. Does this business have good or bad characteristics relative to the average company in the market? We look at five things in terms of characteristics. Growth, profitability, returns on invested capital, market position and management. Market position and management are a little bit harder to get your arms around. We look at these characteristics and then we look at price. You pay different prices for different businesses. Some businesses have inherently better characteristics than others. You're not going to be able to buy software companies at four times earnings. A steel company can occasionally be picked up at four times earnings but they're very, very different businesses. Q: Do you rely mostly on your personal research or that of the Pioneer's staff of analysts for this historical perspective? A: Both. I don’t know how much you know about Pioneer's research staff, but we have almost 20 analysts. They're putting out research for all of Pioneer's fund managers, including the growth fund managers. We take a look at what they do from a value perspective. Q: What else is involved in the search for value in a company? A: One other thing we look at is discounted cash flow models. The research department builds those for every single investment. The final thing we look for is a catalyst. I like to see, if possible, a catalyst. But we also look for two other things. One, best of all, is plain old improving fundamentals. Business is getting better. That's the best of all possible worlds. However, in value land, that usually isn't the case. Usually, the stocks are cheap because the fundamentals aren't so good. Then we either look for a catalyst or what I end up with most of the time is a clear strategic plan from management in terms of how they're going to get themselves out of the mess they've gotten themselves into. That's when the real fundamental research helps you. Q: A review of the holdings indicates the fund isn't particularly overweight in any one industry. Has this changed in recent months? A: I should be overweight in industrials. I'm up in industrials against the value index. If you look at my fund compared to the Russell 1000 Value Index, I happen to be overweight industrials; 10% versus just over 8%. Healthcare is about 8% versus 3.9%, so I'm about double weight in healthcare. In financials, you probably have me as overweight but I am underweight according to the Russell 1000 Value. There are a few bullish bets there. Q: What concerns you about the outlook? A: I've provided the bullish scenario. The area where I have a real concern is the consumer, because the consumer is so leveraged. As a result, I'm concerned about financials. I'm also concerned about financials because I think that if the economic does turn around, rates will go back up. Financials typically don't perform well in that scenario. I also think they are over owned and over bought. They've been one of the best performing categories in the last three or four years. They're now 30% of the S&P 500. You remember technology stopped out at around 35%. In 1983, energy topped out at about 35% of the index. Financials have grown from something like 12%. Q: If you are overweight industrials relative to the index weighing, it sends a message to shareholders that you own stocks that other people don't want. A: Hopefully they will turn around and want them eventually. Q: Do you have an example of an industrial materials stock? A: We break it up differently. We have a section called materials, and we have a section called industrials. In the materials section, I own some Freeport McMoran, Alcoa, and Air Products. It has good management, good returns, nice business; just waiting for the turn to come. On the industrials side, we managed to make quite a bit of money, actually, in Tyco. Q: That is definitely a bet on a turn in the economy. Moving to healthcare, how do you break it down? A: I like healthcare as a group because it's not as correlated to the economic cycles. You're not exposed to the dollar. But most of all, why I like it is the underlying characteristics are pretty strong relative to other industries. There aren't too many industries that are getting pricing. Insurance is one. We're overweight insurance in financials. Also, the healthcare service providers are getting strong pricing. The naysayers will tell you that they're getting pricing, but the rate is decreasing, so the second derivative is declining, so the cycle is peaking, so you want to sell. That's true. The latest survey that came out, their price increases were at 21% last year and this year it looks like they're going to get about 17.5%. That is a decline in the rate of price increase. On the other hand, I'm not familiar with a lot of industries that are getting 17.5% price increases. If you look at semiconductors, the prices are going down. Q: Are there other areas in healthcare that still look attractive? A: One other area where we have a large position that has recently hurt us but helped us overall is in the pharmaceutical business. We like a lot of the pharmaceuticals. The characteristics of the business are very good. You have a lot of companies that have basically debt-free balance sheets and are enormously profitable - net profit margins range from 10% to 20% or even higher. The average net profit margin for the S&P 500 is about 6%. Collectively, they have a great growth profile. They produce a product that saves the world money. It's a lot cheaper to put someone on a drug, even if it's an expensive drug, than to keep him in a hospital. There is demand for their products all over the world. So, we think that if you can buy these at a discount to the market, that is wonderful. There are a lot of reasons why people don't like them right now, but I think these things will pass. There are some things that you could criticize the industry for around the edges, but ultimately the business itself is a great business. One of the problems is it is very easy to tell when a big blockbuster drug is going to come off patent. You can quantify very readily and easily what's going to go wrong with these companies in the future. But, what you can't quantify very easily is what is going to go right. In other words, what do they have in the pipeline? They don't always show you what's in the pipeline. What's in the pipelines sometimes comes along faster than they expected. Also, things come along that have more than one use or prove to be bigger than originally anticipated. For example, Prozac was originally for depression, then for weight loss, and then it became widely used. It's much harder to quantify the upside than it is the downside in the group. Q: The graph of the fund tells a story that says you were doing all right up until the midpoint of 2002, then nothing worked in the second half. Now, everything is working its way back from the low in October. A: One of the great frustrations of this business is that everybody knows in their heart of hearts that there are going to be ups and downs. It's just that when you get a quarter that's down, people start screaming and yelling. We designed the fund with that in mind. When the market is screaming, this fund is not designed to be screaming faster than the rest of them. This fund is designed to participate, to go up nicely, maybe a little bit behind the market, but not to sit there like a lump of coal. On the other hand, when the market is going down, the goal of the fund is to outperform, to go down less. You end up with a lower beta product. But if you do your job right, you should outperform over time with less volatility.