Q:  What is the history of the fund? A : The fund was created about eleven years ago because Huntington wanted to create a small cap fund that was non-traditional and can generate wealth for its shareholders at the same time. I happened to be reading a book entitled, “How the Scots Invented the Modern World,” and there was a passage about traders in Scotland capturing most of the tobacco trade in the colonies because they had a two-week head start over their London counterparts. This advantage was solely due to their favorable geographical location, which they translated into an opportunity. The location advantage is something I believe will have an impact on small cap companies more so than on the larger companies. Large companies are more global in scope and any geographical advantage is of lesser importance. We did a lot of back testing and came up with the concept of Situs, which is the Latin word for location. That is how we came up with the concept and philosophy which is to take our existing investment disciplines that we apply on all of our funds and overlay to those companies that have some competitive advantage based upon the geography of which they happen to be located or operating in. Currently we manage more than $300 million in the strategy between the fund and the trust. Q:  What core beliefs guide your investment philosophy? A : We are a top-down investor, meaning we pay lot of attention to macro-economic events and we spend a lot of time in understanding the economic environment; whether that’s the tax, the political or social environment. Dr George Mokrzan and his staff assist us in our economic analysis. Based on his macroeconomic findings, we conduct additional analysis at the sector level. We really do believe that making contained bets with regard to sector focus can significantly add to performance. We want to have some exposure in all ten broad economic sectors but we do expand emphasis up to 140% of the benchmark or as low as 60% of the benchmark to emphasis or de-emphasis a particular area. Q:  How do you search opportunities? A : For the fund, we start with the list of stocks in the S&P 600 index. The index has small cap companies with market cap below $6 billion, although we do hold some companies that are larger than that in the mid-cap area. If we like the company and if we continue to believe in its growth story and competitive advantage, just because it successfully expands capitalization, we are not necessarily going to sell the stock. We don’t want to impose incremental capital gain on the shareholder, nor do we want to give up on a particular company that has full incremental potential even though it has outgrown the market cap range. Q:  Once you find opportunities, what do you do? A : Once we have a list of companies that are identified by Dr Mokrzan’s research, we prepare a company data sheet. This company based information has an exclusive list of statistics of more than couple of hundred data fields and they are entered into our database to generate three critical scores: quantitative, qualitative and credit. Quantitative score is developed based on the company fundamentals and stock price; qualitative score has forward and backward looking measures and looks at the expected future value, and finally credit score is developed based on the assets and liabilities on the balance sheet. Based on these three scores, we narrow down the list of companies that are within our range and we concentrate on those names. We then are free to conduct additional management analysis and investigate further into the future direction of the company. After the screening process, I look for companies that have the critical geographic advantage and, if the company meets our criteria, I will establish a small position before I commit a full allocation to the holding. With the small position, it gives me time to look more into company fundamentals and momentum. Q:  When you talk of ‘geographical advantage’, what do you mean? A : We tend to look at companies with a more favorable eye if they happen to be in an area or location that gives the company marketing advantage, staffing advantage or proximity to customers, tax advantages and helps it to integrate its business better. We think that growth is the answer to a lot of problems. We look at companies with favorable business location. Every year media publications put out an analysis of best and worse states in terms of their business friendliness. We like states typically that have low taxes and we like states that have something that adds value to the production cycle. We like the locations like Silicon Valley that has deep intellectual capital and access to venture capital base; Baltimore-Washington area for its access to telecom and networking technology development and government contractors; Houston and Austin Texas for their technology and energy markets; and North Carolina for its focus on technology and life science development and access to a vast network of universities and knowledge workers. In Asia, we are looking for companies that have access to raw materials and commodities or an intellectual capital and access to markets as well. We bought Asia Pacific Brewing Company in Singapore because it had an access to the Chinese beer drinking public. We didn’t want to buy Chinese companies at the time so this was our way of getting the access to that growing market. Q:  Can you give an example of 2-3 names of companies that you discovered through the process and what attracted you? A : We are closely looking at the world agricultural supply and demand and we find that as a good investment opportunity. The demand for agricultural products is increasing as people in the developed world live longer and world population is still growing by 237,000 a day. Emerging markets, where most of the population growth is occurring, has growing per capita income so agricultural products are becoming more valuable. In addition, with the world growth in population, land for cultivation is also shrinking. There is lot more money flowing into rural communities because of the explosion of natural gas drilling as well as rising commodity prices. Farm land owners are enjoying higher income and there is a lot more money flowing into the rural communities Cabelas Inc is a specialty retailer of hunting, fishing, camping and related outdoor merchandise. They have a few bricks and mortar facilities but primarily they are a catalogue company selling goods in hunting & fishing and outdoor bikes that appeal to the rural community. With the rising agricultural production and rising farm income in rural areas, consumer spending is increasing in these locations. Because of the same reason, we also like Lindsey Corp, Terra Nitrogen Company and others that are driven by rural economy and farmland growth. Red Hat, Inc, the developer of open source solutions for enterprises is located on the campus of North Carolina State University in the heart of research triangle. This helps company to tap intellectual resources easily from the local universities. In addition to the location advantage, the company has to meet number of other criteria, like its credit worthiness and management expertise in growing business. We also work with an outside research company to collect additional qualitative metrics that we use to analyze the investment worthiness of the company. We are looking for companies that are mis-priced or misunderstood in the marketplace. In addition, we are also looking at the credit score and ten statistics that help us in understanding financial strength of the company. Q:  How many companies qualify as investible universe? A : The number of companies that can qualify for the investible universe varies from time-to-time. We have about 110 names in the fund and we are not opposed to adding more companies if we can find them. However, I am not a closet indexer. The top 10 names represent over 32% of the fund. If we like a company and it continues to meet our investment criteria, we are not averse in holding a company even it exceed market cap limits of the S&P 600 index. Q:  Do you establish price targets for your holdings? A : We do have price targets on our holdings but we rely more on qualitative reasons to sell. We are also mindful of the portfolio turnover and capital gains for shareholders. Our turnover is in the range of 20% and rather than selling our holdings if the price exceeds our immediate target, we lock in gains with the help of options and also limit the losses. With this strategy in place, we are able to keep portfolio turnover low and also limit capital gains and losses in check for our shareholders. However, we sell for qualitative and quantitative reasons. Selling can be prompted for a number of reasons like the company lose its patent protection or there is a management shakeup or company’s key products lose market advantages. I also watch closely what other key shareholders are doing and how they are acting to the changing situation for the company and its marketplace. Q:  How do you define risk and how do you manage it? A : We think risk is two dimensional, market risk and credit risk. We diversify as much as possible to manage market risk with a number of holdings and avoid concentration in a sector or industry. We are also cognizant of the credit risk as well, which we think is a bigger risk and we spend lot of time in analyzing the balance sheet of the company before we select for the portfolio. We watch the tracking error but that’s more of a concern to the consultants than to us. Our philosophy and strategy and the use of option strategies alters the traditional ways that you would measure the tracking error. We do attribution studies on all of our funds every quarter, to see if the performance is driven by sector allocation or from stock selection or from trading. Q:  What do you think of sector allocation and stock selection? A : We’re top-down investment organization so sector weights are extremely important. We think they have much greater implications than actually picking the stock. As you know some of the sectors have been blurred by how companies are perceived. So we look at both sector and selection as important, however, we feel the sector traditionally is more impactful. Q:  Has the strategy changed in the last eleven years? A : Maybe not just from the stock perspectives. After 2008 many conceptions of the markets were altered. Asset allocation models, because of their basis in history, have been revamped to reflect that things have changed. Demographics have changed in this country and with the level of national debt we know we are going to go through a slower economic growth. We know the dynamics of global growth are going to be coming from the so-called emerging nations. We are constantly reappraising what we need to do when there is a change in tax policy, change in government administration and change in regulation; since they all have massive implications for the stock market and affect the wealth of the economy. You just have to look at BlackBerry and Nokia to see what competitive forces have done to them. At the same time look at the medical devises makers who are facing aggregate higher costs because of incremental sales taxes that have been imposed as part of the new health care package. All these things come into play and we think that is one of the values of the top-down philosophy is that you need to have a good understanding of the macro economic factors that will impact the future of a company, industry or investment strategy.