Q: Right after the start of Operation Iraqi Freedom, the Paris Bourse rallied, as did many markets around the globe. The liberation of stock markets has continued. What is your view? A: They haven't been any different than anyone else. From our perspective, actually from just about a year ago, we didn't have anything in Germany or France. There was no geopolitical call. It's just that we couldn't find any businesses that we wanted to buy. Europe has underperformed with the U.S., but generally it has kept up. Q: Looking at the five-year chart, the graph is shaping up as a buy low - sell high situation where the bargain hunters have entered the picture. A: From our perspective, we're kind of agnostic of what the overall market conditions are although we may be still dependent for one month or two on the volatilities of the market. We want to buy good businesses that have been down for a long time and have generated high return on equity and high return on assets that should be able to sustain that going forward. But, they are also selling for some reason at our prices or low prices. That kind of drives the whole process. Q: You have recently taken the helm as manager of the fund. What changes have you implemented? A: I've been co-manager of the fund since 1994, but I took over as portfolio manager in January of 2002. We underperformed quite significantly in the second half of 2001, primarily because some of the names in the UK -- the earnings didn't come through and they came under tremendous pressure. One of the lessons that we learned is that you have to be careful in terms of paying up. You don't want to pay up too much. That brings us to full circle with what you mentioned. One could pay less or one could pay more. From our perspective, we're not going to pay any more than what we believe the business is worth. That is one of the key lessons we learned from the 2000 and 2001 era. We were all right before that. We believed that the valuations were sustainable and obviously they were not. A lot was built on expectations. If you look at the portfolio now, we will be equally comfortable irrespective as the market goes up or down. Q: What I noticed from the turnover figures, the annual change is very high, but the recent change is very low. Have you settled in on what you want to own for a while? A: The reason the turnover was high last year was, as I saIdent, this is a very humbling business. The key lesson, as I mentioned earlier, is you want to be very careful how you value businesses and how you normalize earnings, because that is what really caught us in 2001. Subsequently, when I took over, there were a number of names in which I was less confident in terms of what the companies were trading at and what they could possibly deliver. That's why the turnover was higher. Q: I can see from the recent reports that the tone has the Buffett feel to it, how careful a company is for example with its revenues. A: I'll give you an example, Heineken. We started buying last November and December. We sold it last March because it hit our price target of around 50 euros. We wanted at least a 25% margin of safety from our valuations. The stock came back to around 39 or 40. There was enough upside here. We started buying, because we believe it's a fantastic franchise on a long-term basis. We believe that what is happening right now is that it is a cyclical short term issue. The bulk of their growth comes from on premises not off premises. That has hurt them. Volume, though, is still running double digits in California. The latest Nielsen survey that came out showed they're gaining market share in the U.S. Also, due to SARS, the travel situation didn't help them. The first half of the year didn't help them with double digit growth, but that was prior to a far-from-normal environment. We believe it's a heck of a bargain here. They have high insider ownership. The growth in the premium beer market is much more rapid. The strength in the euro has hurt the earnings, but in the long run currency is a wash. Q: Your portfolio is fairly concentrated. A: We own around 46 or 47 companies. We don't own to have small positions. It’s too difficult to find 100 of them. Fifty is difficult. Q: You did have consumer goods companies, things that are replaceable, like Nestle and Diegeo. A: I definitely have a bent toward consumer staples and that is because if you look at the landscape, where do you get dependable, high quality growth which is cheap? Where do you get stocks selling at 11 times earnings that will grow on a three- to five-year basis? Because that is the time horizon we take. And, it's very predictable. These are not capital intensive industries. They throw off free cash and we want free cash. You can't buy industrials or paper companies in Europe. They have been consuming cash over the last five or 10 years. To top it off, they don't look cheap. If you look at the earnings power of these companies and what they can potentially earn, they don’t look cheap. Q: Many businesses still sell at a premium despite the bear market. A: Look at Nokia, for example. Their cash from operations has gone down from $5 billion to $2 billion last year. The earnings per share have doubled. Earnings can be created by a number of ways. Cash is difficult to create. Q: All deep value managers I've interviewed say it is impossible to manipulate cash flows without violating securities laws. A: The numbers tell a different story than what the market is expecting. The handset infrastructure business is in extremely bad shape. They're losing money there. Q: The new bells and whistles appeal mostly to a certain age set. Digital picture phones may not have widespread appeal. A: The big area is supposed to be China. In China, the inventories are piling up. There are more than a dozen local Chinese players that used to manufacture refrigerators and dishwashers. They're selling them for $5. You can't compete with that. Not everyone is going to pay $500. Q: I noticed you have no internal Chinese investments. A: Last I checked we're exporting high valued added goods. BAT is a dominant player in all the emerging markets. Their brands are the most popular brands in China. If anything opens up they will benefit. India, Russia and Eastern Europe - we believe in them more than Philip Morris. Q: Why do you exclude Chinese companies? A: It's interesting. We don't own any Chinese stocks not just in this fund, but also in the Emerging Market and Far East funds. Generally speaking, the reason we don't is because I don't understand or trust the accounting. It's a fantastic country, but I'm not sure for the shareholders. I think there is a difference between how shareholders pan out compared to the citizens of a country. Just because the GDP is doing well doesn't mean the shareholders are going to do well. Q: In China or elsewhere in the world? A: Ultimately you buy the company; you don't per se buy the country. If the business is functioning poorly or if they're making bridges from here to nowhere, like they're doing in Japan to the village of the local senator, it does nothing for the profitability of the company. Q: In viewing the MSCI EAFE index weightings compared to your fund, I see you are zero in certain industrial sectors. A: Yes. Q: That is telling me that aren't paying attention to what Morgan Stanley says you should own. A: That's right. It's a big profit center for Morgan Stanley. Let’s not forget that. They change the index list. You have to see the list going in and out every month. They make money out of it. We don’t want to mimic the index. We want to buy the better businesses at cheap prices. If it's not part of the index, then c'est la vie! Q: Since you're static now in your positioning of the fund, what is your outlook? A: Let’s look at the portfolio like a stock. That is the way I would like to look at it. What is the stock selling at? Q: The stock is selling in terms of valuation a PE of 13.78, which is much lower than the S&P 500 of 20 times earnings. That is a historically low PE if you take the value approach. A: In our case, these are real PE ratios. The reason is there are no restructuring stories. There are no turnaround plays. Q: In America there have been a lot of restructuring stories. A: All of Europe is a restructuring story. I think it always will be. No one should ever pay any heed to how and why Europe is going to change. There is too much legacy here that is very difficult to change. Pensions, deficits, etc. Demographically, these countries are aging. If you make a top-down case, it's very hard to justify buying anything there. You're not going to make or lose money purely based on how you look at the world as such. Q: How do you look at the world as such? A: The best way I believe is to find businesses which are doing well, which are making money and are cheap enough. You can make a lot of money just from buying those businesses. It could be in the worst places. The last 20 years, you would have made a lot more money there than in Germany. Twenty years, not two years. And Germany has been a better place in terms of per capita income over the last 20 to 30 years. Q: What made Mexico better than Germany? A: Because there are large companies there that have been growing. They’re cheap and a lot of them are still cheap today. They were focused on creating shareholder value. Not all of them, obviously, but there were enough. That's what took Mexico up. Companies are destroying shareholder's money in Germany. Going back to the Vontobel International Fund, its trading, as you saIdent, 13.7 times earnings - it's growing at a rate of double digits. I ran some numbers and in the last 12-month basis, the reported earnings grew at 10% in a recession. The return on equity is 20%. The dividend yield is 3% plus. It's not that we look for dividend yield, but most of the companies we own are mature. They don't need the cash. Half the companies we own are buying back stock because they can. If the portfolio can grow its earnings in a recession, it can do better in a non-recession. It doesn't mean you're going to make a lot of money, but the more the certainty you will be all right. We will outperform the index. I'd rather under perform in an up market than lose my shirt in a down market because you only have 100% to lose. It doesn't matter how much money you make. If you lose 90% it can take your lifetime, if ever, to recuperate that. If you grow at 20% for two years and then lose 50%, that's worse than saying, “I'm going to grow at 10% and then I'm going to lose 5%.” You're better off in the latter one. I think it is simple math, which kind of escapes other people. Q: This ‘all or nothing approach’ leaves you with nothing. A: On a global basis, there are enough things going wrong somewhere along the line that we should be able to find something. This is a big world. Not everything goes in sync. Q: In conversations with multi-sector bond fund managers, they show how capital is mistreated around the world. How do you see capital flowing around the world? A: It’s hard not to admit the fact that capital is going outside the U.S. Look at the way the dollar has reacted in the last 12 to 18 months. I think that this is going to continue. We just have too big a deficit to sustain a strong dollar.