Q:  What is the history of the WCM/BNY Mellon Focused Growth ADR Exchange Traded Fund? A : WCM/BNY Mellon Focused Growth ADR is an actively-managed ETF focused on achieving long-term capital appreciation above international benchmarks. The fund was launched on July 20, 2010. The fund is sub-advised by WCM Investment Management and co-sponsored by BNY Mellon. The portfolio managers of the fund are Paul Black, Kurt Winrich, Peter Hunkel and Michael Trigg. Q:  What are the underlying principles of your investment philosophy? A : In our view, attractive returns can only be achieved by structuring portfolios distinct from the market indices. We believe that the benchmarks in the international space are inefficient. Consequently, our focus on high-quality growth businesses separates us from benchmarks and seeks to generate excess return in a variety of market environments. The four pillars of our investment philosophy are tailwinds, economic moats, the importance of leadership and company culture, and a valuation discipline. By tailwinds, we mean long-term secular growth trends, that is, five-, ten- and fifteen-year type themes. In contrast to businesses fighting economic headwinds, we want to own companies that are essentially in the right place at the right time. Some of those tailwinds would be, for example, the emerging global middle class or increased use of technology. It is extremely important for us to see that each company has an economic moat. We want to invest in companies that have a sustainable competitive advantage so that they can profitably benefit from a tailwind. Furthermore, we pay attention to the corporate culture and leadership of each company that we own. What’s important is finding a business that values its people and has a structure which supports that. We tend to prefer decentralized decision making, variable compensation and/or a stimulating environment for employees. Lastly, we look at valuation. Unlike some growth managers, we are concerned with the price that we pay for these businesses at the time of the purchase. Q:  How do you build your investment strategy on the back of this philosophy? A : Beginning with tailwinds, moats, culture, and valuation, we define our universe as large cap and we are long-term oriented. Also, the companies in which we invest for this ETF must be available in ADR form. As a result, our investable universe is a relatively small list of companies. The basic screen gets down to about 1,000 companies, and of those we think there are probably no more than a couple of hundred that meet our additional investment criteria. We think that our emphasis on quality and valuation is critical and is, in part, responsible for our significant downside protection. And though valuation is an important tool in monitoring the price that we pay for a new position, even more importantly it helps us, on an ongoing basis, with managing position size. With regard to geography, we generally limit ourselves to companies domiciled outside the U.S. But we can own businesses like Coca-Cola Enterprises which, though based in the U.S., generates 100% of its revenues from Western Europe. Our investment strategy group of four members – Paul Black, Kurt Winrich, Peter Hunkel and Michael Trigg – makes all decisions concerning the portfolio with the support of two additional business analysts. Q:  How do you define high quality? A : We define high quality as businesses with high returns on invested capital, low or no debt on the balance sheet, consistent and predictable earnings and, most importantly, a strengthening competitive advantage. Q:  What is your research process? A : We are a bottom-up fundamental investor. We try to find great businesses one-at-a-time by taking into consideration portfolio diversification by country, industry, or currency. Grounded in our investment philosophy, our research work consists in identifying tailwinds, understanding the economic moat, doing an evaluation of the culture and leadership and looking at the valuation. We measure value in terms of historic free cash flows and our expectations of future cash flow growth. Our portfolio managers and research team members travel extensively to meet with the companies in which we invest. As we tend to get more granular in our approach we like to keep a pulse on the local economies and business trends. Although gaining an informational edge when investing in large, well-established multinational businesses is difficult at best, we think we do have a temperamental edge, expressed in our long-term orientation, and an analytical edge, manifested in the more qualitative elements of our process (e.g., our work on culture). Moreover, an investable universe of just a couple hundred names, and a focused portfolio of just under 30 holdings, means we can easily stay abreast of any developments in those businesses. Q:  Why do you invest in the emerging global middle class? A : We are pretty confident that most of the “developing” world will continue to, well, develop. This means that the changes and trends we observed in the developed world (e.g., the U.S.) over the past 50 years are likely to play out again, albeit with various timings, in the developing world. We’re talking about growth in consumer spending, which tends to drag along with it both technology and healthcare. But unlike the developed world, where all you have is modest income growth and population growth, in the developing world you have both of those plus significant growth of the middle class itself. For example, we own Arcos Dorados Holdings Inc, the South American franchisee of fast-food restaurant operator McDonald's Corp. The company, which we bought recently, is based in Argentina, but their real growth market is Brazil. Over the last five years, the middle class in Brazil has grown by about 35 million people. Another 30 million are expected to join the middle class in the next three years. So, in that environment, the aspirational nature of both eating and working at McDonald's is a powerful growth tailwind. With the middle class still expanding and two-income families still growing, the demand for these kinds of products and services are expected to grow for many years ahead. What is more, these companies often dominate their industry and are likely to continue that domination well into the future. Q:  What additional factors govern your research process? A : We strive to focus on simple businesses and free cash flow, the latter serving as a key metric in our preliminary research. Among other significant metrics in our assessment are business models and the different growth levers that drive revenues and earnings. If a business is not transparent, or if we cannot understand it, we are not interested in it. Most European money center banks are good examples of this. Additionally, we focus on low or no debt as an important part of the balance sheet. Q:  How important is the role of the margin-of-safety principle in your strategy? A : We definitely pay attention to a margin of safety and model a number of different scenarios for each business that we own. The discount to our estimate of intrinsic value of the company or its stock price is very dear to us, so typically we seek 30% or more. Despite our comprehensive research, market sentiments can fluctuate dramatically, and this discount, or margin of safety, can save us from future unknowns or declines. Of course, our insistence on a particular discount will differ from one business to another. For instance, Nestle is an incredibly consistent business and the company is able to give pretty accurate long-term forecast on their projected growth. This is perhaps a company where we require less of a margin of safety than in a business like Baidu, the China-based search engine, which has a much broader range of potential outcomes. Q:  How do you build your portfolio? A : We prefer to build a focused, high-quality, large-cap growth portfolio for the non-U.S. universe. In doing so, we own up to 30 stocks in the portfolio that represent our best ideas. Presently, we have 27 holdings in the portfolio. Our long-term historical turnover is about 25%, approximately half of which is attributable to name turnover, with the balance due to trimming from or adding to existing holdings. As far as changes in the portfolio are concerned, whether adding or trimming a name, most of that leans on the valuation work that we do. However, when it comes to putting our best ideas in place, there are some basic portfolio construction constraints that we apply. For example, our maximum exposure to emerging markets is 35%. In addition to that, we also have constraints based on sector and industry. Given our exposure to at least 15 industries, the maximum position size is 10%, while the maximum sector size is 45%. Broadly speaking, we are constantly committed to maintaining the portfolio well diversified in terms of regions, countries, sectors, currencies and industries. We tend to find ideas that meet our investment criteria in the more traditional and conventional growth areas and less so in cyclical areas. While we may have a name or two in areas that are more cyclical like basic materials, utilities or financials, we put much more emphasis on conventional growth sectors like technology, healthcare and consumer staples/discretionary. In general, we are indifferent to benchmarks since, as noted earlier, we believe attractive returns can only be achieved by structuring portfolios distinct from the market indices. The MSCI All Country World ex U.S. Index is arguably the best benchmark for us because of our exposure to emerging markets and to Canada. But we are comfortable being measured against the MSCI EAFE Index or the MSCI EAFE Growth Index too. Q:  How do you measure and mitigate risk? A : As mentioned earlier, the emphasis on high-quality companies and valuation helps us to manage the downside risk in the portfolio. Most of the companies that we own are multinational in scope with geographically diversified revenue bases. This also aids in controlling overall portfolio risk. Finally, the valuation work that we do serves as an important risk control measure on an ongoing basis.