Q:  What is the history of Heartland Funds? A : Founded in 1983, Heartland Funds is an independent, employee owned advisor with approximately $5.4 billion under management in mutual funds and separately managed accounts. Our fund family includes the Select Value, Value Plus and Value Funds. All three Heartland Funds are managed with the same consistent investment process. Heartland Value Fund, which was launched in 1984, invests in small and micro-cap value stock and has less than $1.5 billion market cap with a significant number of holdings below $300 million. The Heartland Value Plus Fund, which invests in small-cap value stocks that pay dividends, has a market cap range between $250 million and $4 billion. The third fund is the Heartland Select Value Fund, which invests in value stocks across all market capitalizations; market cap is generally more than $500 million. Q:  What are the fundamental beliefs behind your investment philosophy? A : Our philosophy is based on focusing on potentially inefficient small- and micro-cap markets, which have historically outperformed. We feel the small and micro-cap segment of the stock market is robust with thousands of publicly traded issues, many of which lack traditional Wall Street research coverage. Thus, we believe this market is often inefficient, mispricing businesses and offering opportunities for fundamental research-minded investors like us. We employ a contrarian value investment approach targeting stocks that we believe have low absolute and relative valuations, strong balance sheets, improving earnings expectations, and are priced at a discount to their intrinsic value, having a true catalyst. Q:  How do you apply this philosophy to the Heartland Value Fund? A : The Heartland Value Fund focuses on small and micro-cap companies whose market cap range is less than $1.5 billion, with a significant number of holdings below $300 million. The fund utilizes a disciplined value investing approach to identify companies with the potential for appreciation and a potential margin of safety to limit downside risk. The investment process for the Heartland Value Fund is based on the ten principles of value investing with both qualitative and quantitative aspects. On the qualitative side, we look for companies that have a catalyst for recognition to what we believe a company’s true intrinsic value or worth is. Other qualitative points would be the effectiveness of business strategy and the management team’s execution. And on the quantitative side, we look for companies that are trading at low multiples of earnings and cash flows and book values married with financially sound companies. We like to buy companies that have a limited amount of debt. Q:  Could you elaborate on your Ten Principles of Value Investing? A : The first principle is the catalyst for recognition. We identify specific catalysts that we believe will cause a stock's price to rise, closing the gap between a current stock price and the company's true worth. The second principle is about addressing capable management and insider ownership. Historically, we have seen that companies that have insider buying can outperform the market. Conversely, we also monitor insider selling. The third principle is a sound business strategy, and the fourth principle is a positive earnings dynamic. We favor companies with improving earnings and upwardly trending estimates, as earnings tend to drive stock prices. The fifth principle focuses on positive technical analysis. Technical analysis is a tool useful for avoiding stocks that may already be subject to speculation. We are attracted to stocks that have "bases," trading within a narrow price range which has typically followed a down trend, or bear market. These are the qualitative components. More quantitative, the sixth, seventh and eighth principles are low prices in relation to earnings, cash flow, and book value, which have historically out-performed. The ninth principle is the value of the company. We synthesize all the valuation metrics like the prior merger and acquisition multiples on an enterprise value to EBITDA basis, run discounted cash flow analysis using conservative assumptions and see where the stock has traded in the past to assess the value of the company. Finally, the last principle is that of financial soundness. We’re focused on investing in companies with debt-to-equity ratios that are less than 25%. We prefer investing in companies that are not encumbered by long-term debt. Q:  How would you describe your research process? A : We are a bottom-up, research-oriented fund that finds great companies at low prices. The fund focuses on a universe of 10,000 stocks whose market cap is less than $1.5 billion. Generally, we narrow that down based on valuation metrics and create grids for at least 300. By meeting over a thousand management teams each year, we do extensive due diligence regarding business model, financial profile, and industry dynamics, and create detailed financial statement analysis. We monitor insider buying activity which is also a helpful screen. A lot of our idea generation comes from meeting with management teams and combining that with some of the screens that we run to monitor insider buying. Every grid or research piece incorporates those ten principles of value investing in that the value of the company will outline the company’s worth based on historical valuations. When an idea is presented the total score is measured and discussed; we have a weekly investment meeting where the entire investment management team participates. We buy names that generally score seven out of ten, or higher. So, if we like a management team but the company scores only five out of ten, we are not likely to buy it. Finally, we construct a diversified portfolio that we believe offers upside opportunity while potentially limiting downside risk of 125 to 175 stocks. Q:  Would you give us a few examples? A : A holding of the Value Fund is a company called Newpark Resources, Inc. It is a diversified oil and gas industry supplier. We have owned Newpark for more than four years. When we first bought the stock of Newpark, it was out of favor. The company developed water-based drilling fluids (as an alternative to oil-based mud systems). In addition to being more environmentally-friendly, water-based drilling fluids are safer and easier to use, and the cuttings can be easily disposed of, unlike oil-based systems. It was a huge market opportunity for them so we were monitoring the trials of this particular product. Wall Street started to think more optimistically about it, buy ratings came out on the stock, and the stock moved from $4 to $5 up to about $9-ish. We sold it prior to the third quarter of last year. They subsequently disappointed very badly in that third quarter, and the price stepped back to the $5 or $6 level. We reinitiated the position there. Another example of a holding that we have owned since the third quarter of 2009 is Gammon Gold, Inc., a mining company. We liked Gammon because of its financial soundness, its debt-to-capital ratio was just 5%, and relative to its peer group it was trading at very attractive valuations of 10 to 12 times cash flow. But the stock fell down a year ago because they had to shut down one of their mines in Mexico because of labor disputes. However, this issue got resolved and insiders were buying in anticipation of settlement. It is a good example of our process. It is not a well-liked stock. The catalyst in this case is that their production is growing quite favorably now that the new mine is opened and it is trading at very attractive valuations relative to its peer group. Q:  What are your sell criteria? A : There are a number of reasons why we would sell a stock. First, when the stock meets fewer criteria of the 10 Principles of Value Investing, we sell it. Second, we sell a stock when the catalyst doesn’t materialize. Third, if the balance sheet is deteriorating it's a major red flag for us. We are certainly likely to sell the stock in that event. Q:  What are your views on portfolio construction? A : The fund is diversified. We have 140 stocks where the top ten names probably account for 25% to 27% of the total portfolio. The larger positions do carry more weight. The top 25 probably account for 40% of the holdings. The Value Fund portfolio has about 20% of companies with market capitalizations greater than a billion dollars, and another 40% of the portfolio is in companies with market capitalizations of less than $300 million. Individual stocks usually represent less than 5% of the portfolio and sector weights typically are managed to less than 25%. Our biggest overweight relative to our benchmark is within the healthcare space, which represents 24% of the portfolio allocation and our biggest underweight is in the financial space accounting for 6.3% of the portfolio at the end of the first quarter. Our benchmark is the Russell 2000 Value Index. Q:  What is your perception of risk? How do you mitigate it? A : There are a few ways we mitigate risk, which we view as a permanent loss of capital. First of all, there is the systemic risk and we try to decrease it by having a diversified portfolio. Also, there is a certain degree of financial risk, and we try to lighten it by not owning over-leveraged companies where the debt-to-capital ratio is a lot less than the benchmark. Finally, there is additional risk of unforeseen events, which we try to limit by buying companies that are trading at discounts to their historical valuations or around those trough valuations and discount to their peer group.