Q: Do you have programs for international equity or high-yield bond exposure, for example?

A: On the separate account side, we offer a number of options for international investments. We have some global managers, including one in-house portfolio that can invest overseas to whatever extent they feel is appropriate. Of course, one could also hire separate account managers who specialize in international stocks, and there are a number of outside managers on our reference list that fit that qualification. But we don’t have an international only program internally, even though our global portfolio has a healthy percentage of global stocks.

Regarding bonds, we have a little less offerings. The large account size is very important for liquidity in the fixed income business, so when you get into unusual asset classes, such as high yield, you need large account sizes to manage those portfolios effectively. That reduces the attraction of separate account management if the size isn’t into the millions of dollars, so we don’t offer anything in the high-yield category right now.

We offer investment-grade fixed income products, including Treasuries, corporates and mortgage-backed securities, as well as muni-bond programs, which have been Gallatin’s fastest growing fixed income separate account type. Here we’re able to do all the customization that really makes separate accounts attractive. In particular, we’re able to offer state-specific muni-bond portfolios for investors who have residence in states offering state tax exemption and federal tax exemption. This is something that’s much harder to do in a pooled account world.

For example, if you own a Missouri bond, you not only get the federal tax exemption, but also a state tax exemption, or income tax exemption on bonds issued by Missouri municipalities. That’s the case in many states, so a lot of muni-bond investors are looking only for bonds issued within their state. In some very large states, like New York or California, that may be less attractive as there are mutual funds available. But in many smaller states there are no mutual fund options, so a separate account is an ideal structure to meet that need.

Q: Since Gallatin works with diverse internal and external managers, how would you describe your core offerings?

A: Our equity business has been a value management business from the very beginning. We offer a large-cap value portfolio, a small-cap value portfolio, and an equity income portfolio, which is an all-cap portfolio with an emphasis on dividend income. Those are the three primary equity offerings of the internal Gallatin Asset Management.

We also offer the Value Opportunity portfolio, which is a concentrated all-cap portfolio, and All-Cap Global, which is our newest portfolio that can allocate a signifi- cant portion of the assets internationally. On the fixed income side, we’re mainly an investment grade manager, which invests in munis. We also offer investment grade corporate and US Treasury portfolios.

Q: Could you describe the manager evaluation division? How do you identify managers and what kind of research do you perform?

A: We merged the two groups that focused on mutual funds and on separate account managers and reorganized them according to investment style and asset class. For example, our fixed income analysts evaluate fixed income managers regardless whether they’re separate account or mutual fund managers. The same refers to our value, growth, small and large-cap managers.

The analysis is not just a quantitative comparison. The analysts travel to visit these managers and evaluate not just the money or portfolio management skills, but also the structure of the organization, the stability, the experience, the ownership structure. It’s a very complete program that involves a thorough understanding of the operations.

A separate account manager must have certain qualifications to get on the reference list, such as minimum years of experience in the business, minimum staff requirements, etc. We’re not too interested in small one- or two-man shops, but we’re looking for some redundancy in the organization and a minimum of assets under management.

Q: How many portfolio managers and analysts do you have in the firm, both in the internal and external programs?

A: I have 8 equity and 3 fixed income portfolio managers and analysts and that doesn’t include our trading and back office staff.

Q: What is your view on risk control? Do you employ controls similar to those of mutual funds or you customize that as well?

A: We believe that our primary investment risk is addressed through our valuation analysis and that’s quite typical for value managers. We believe that we mitigate risk by not overpaying for stocks, so we need a very good idea of what a company is worth in a given industry. We do company analysis as opposed to just stock analysis, and we view ourselves as if we’re buying the entire company.

We also believe that the types of companies we buy is important. We only buy companies that have substantial competitive advantages within their industries, and we avoid the ones with no pricing power, such as commodity businesses, for instance, or companies that are fourth or fifth in their industry.

Finally, we look for companies that are cash flow positive. We just don’t have any interest in cash flow negative companies even if they’re growing fast, and that’s important in terms of risk control. So stock selection and evaluation is the primary risk control. Second is the proper diversification of our portfolios. We believe that if we do that right, our investment risk is under control.

For separate accounts it’s also very important to make sure that an investor’s account isn’t off the beaten path. I believe that this should be a consideration for separate account clients because most managers have thousands of individual accounts. It’s important to know that your manager hasn’t lost track of your account, so we have first-rate systems that allow us to keep track of all the accounts minute-by-minute. We make sure that all the portfolios are following the model and that no one suffers from something that doesn’t happen to the overall portfolio. That’s a very important part of what we do.