Q:  How is your research team organized?

A: We have a team of analysts divided into sectors, who do fundamental research on the companies that we own, or that rank well. In addition, AIM has sector funds with their own teams. Our team is able to tap into these different teams, and that's a rich resource of information.

Our analysts look at industry factors, such as addressable markets, the competitive environment, pricing, product cycle, etc. Then, they look at company specific factors. We’re trying to find all the different fundamental factors and drivers of a company’s performance, where it differs, and most importantly, where we can get ahead of Wall Street.

Our analysis is based on factual data, not on opinions or top-down calls. It is all about what's happening at the company, using objective data to determine why, and to what extent, estimates are low. Our analysts input internal earnings expectations into a spreadsheet that contains data about what we think the company can earn and where it differs from the Street.

Q:  In terms of portfolio construction, can you describe the types of holdings, the turnover, the sector ratings? Do you follow any benchmarks?

A: We own 50 to 80 stocks in our portfolio. Typically, the largest holding is around 5%, but there are few large holdings. It’s a diversified portfolio across different sectors and industries, but is built with a bottom-up process. We also make sure that the portfolio doesn’t become too concentrated in the most expensive stocks in our universe.

We're compared to the Russell 1000 Growth Index, but we're not an indexcentric manager.

We won’t own a company unless it meets our strict criteria. Over time, we won’t look like the index.

Q:  Could you give us some examples of stocks that your research process successfully identified and an example of when it didn't work so well?

A: Nordstrom’s (the department store) would be a good example. A couple of years ago it ranked well in our models and our analyst found same-store-sales expectations to be conservative. Additionally, Nordstrom had implemented a new inventory management system, becoming more efficient. Their margins were low. Based on the fact that same-store sales and margin assumptions looked conservative, our analyst projected that numbers should move higher over the next year. We bought the stock and both same-store sales and margins exceeded expectations.

Of course, there are stocks where our process fails. An example was Dell last year. It ranked well in our models. Through our fundamental work, we identified a couple of factors that would provide a cushion to earnings. First, we thought that their market share would accelerate, as IBM was selling its PC business to Lenovo, because every time we had seen disruption in the PC channel with these types of deals it led to share gains for Dell. In addition, Dell was generating excess free cash flow, which we expected to be used to buy back stock. We thought this aggressive share buyback was not properly factored into estimates.

We were right about those two factors, but we missed one point. Average selling prices came down faster than we expected. Dell mispriced its products, which caused estimates to come down and Dell's stock underperformed.

Q:  Since you invest in large companies with multiple product segments, geographic markets and currencies, doesn’t it get difficult to track 400 companies?

A: Yes, there are a lot of moving parts with these large companies, and we know that sometimes we are wrong, but that's why we have a diversified portfolio. We believe that it’s all about a disciplined, objective approach. Even with large companies, there are usually a couple of important drivers that you can point to in the income statement, while most other factors cancel themselves out over time.

The important part is identifying the main drivers. A recent example would be Hewlett-Packard. The new management team focused on reaccelerating the top line through new products and on expanding margins through cost cutting. In that perspective, the top-line assumptions were not aggressive. We thought that they could at least hit those numbers with new products and identified cost savings.

Q:  What are the milestones of your risk control process?

A: Our whole process is focused on doing a better job than our competitors in managing risk, and we believe that's one of our advantages. By identifying highrisk stocks and carving them out of our universe, we believe we have a clear relative advantage with regard to risk management. Furthermore, we limit exposure to the most expensive stocks in our universe.

We also use software tools that allow us to identify fundamental and macroeconomic risks in our portfolio. For example, what happens to our portfolio if interest rates jump unexpectedly, or if oil prices skyrocket? Overall, we use a diversified set of tools for risk management.