Q: What is the investment philosophy of the fund?

A: AIM’s investment philosophy has been applied to international markets since the inception of our AIM International Growth Fund in 1992. The AIM European Growth Fund was launched in 1997 and this saw the philosophy applied to the dedicated European universe.

Overall we believe that a diversified portfolio of attractively valued, quality companies with under-appreciated growth, or improving growth prospects will outperform its benchmark over the long-term. So our philosophy and focus are really built around three key criteria, namely earnings, quality and valuation.

In terms of earnings, we believe that stock prices are primarily driven by earnings growth over the long-term. While this is not always the case in the short run, we believe it is the case in the long run. We also believe that investors tend to underreact to positive or improving earnings news and that this is true over time as well as across all markets. We seek to take advantage of the investment opportunities that result from these behavioral tendencies.

In terms of quality, we believe that companies with strong return on invested capital, or that are good capital allocators, tend to deliver long-term value to shareholders. Strong return on invested capital usually means ability to generate cash flows that can be efficiently invested back into the business.

Valuation is the third stock selection characteristic on which we focus. We want to make sure that we are not overpaying for future earnings growth. Part of our discipline is to look for companies that are undervalued because the market doesn’t fully appreciate the growth prospects. Our performance record has been built on our ability to identify these companies that subsequently grew faster than the market expected.

Q: How would you define the strategy of the fund?

A: This is a well-diversified fund that provides rare “one-stop”, all-capitalization exposure across a broad spectrum of European markets. We’re bottom-up growth investors and therefore, most of our time is spent analyzing and identifying the most attractive companies to purchase. We’re not traders by nature and our turnover tends to be around 70%.

We don’t spend a lot of time focusing and debating top-down macro issues like interest rates and currencies and we also don’t hedge our currency exposure.

We’re flexible and take advantage of attractive opportunities as and when they arise. For example, in the 1990s the fund held about 50% large-cap stocks and 50% mid and small-caps. Over recent years, when small caps were significantly cheaper, we took advantage of the low valuations such that the large-cap portion fell to as low as 25% of the fund. That proportion has now risen again to about 35% today.

Q: Can you explain your portfolio construction process?

A: Managing risk is important to us. Our objective is to own as many of the more attractive stocks as possible subject to “not having too many eggs in one basket”. We primarily build our portfolios bottom-up resulting in a broadly diversified list of around 100 holdings. Individual security holdings tend to be limited to 5% of the fund, but in general stock positions rarely exceed 3%. Top 10 holdings usually represent about 25% of the fund. Liquidity is also important so we don’t want to own too much of any single stock.

We are also mindful of benchmark and absolute risks when diversifying across sectors, regions, countries and market-cap exposures. We think this approach can really improve the fund’s overall risk profile. We hold relatively limited emerging market exposure. We can go up to 20% of the fund but usually keep it at about 5%.

We tend to employ a fully invested strategy with cash levels usually representing less than 5% of the fund. We are not going to suddenly raise 15 -20% cash because we don’t like the market.

Q: Can you define what is Europe because that definition has changed so much over the past ten years?

A: Europe’s population and economy now rival the U.S. for size! I think people also don’t fully appreciate just how well European markets have performed and the range of attractive opportunities that can be found there. Our definition of Europe is really quite broad and includes a wide spectrum of attractive investment opportunities in both developed and developing markets. It includes all the countries in the European Union (EU), those on the outside, such as Norway and Switzerland, and also those East European countries that are joining, or are waiting to join the EU. We also include Russia which has, or a part of it has, always been in Europe.

Q: Do you follow a benchmark that represents Europe?

A: Short-term we don’t really focus closely on a specific benchmark, but over time our objective is to outperform other European category funds as well as the MSCI Europe Index. So we’re benchmark aware but we also believe that we can add value by investing outside the benchmark, whether in a company or an entire market. This can also add diversification benefits and our fund is often less correlated with the benchmark than many of our peers. We think this is an additional attraction of our fund.

Q: Is it fair to say that your discipline would lead you to buy growth areas that are underpriced?

A: I think that is fair to say, but everyone cares about valuation and everyone cares about growth - but the difference is to what exact degree. It is fair to say that we are looking for growth at reasonable prices, but again I should emphasize that we focus on finding companies with attractive combinations of earnings growth, quality and valuation.