Q:  Do you also restrict your exposure to sectors and industries?

A: No, our sector exposure is a function of the individual stock selection process. Theoretically, we can select 39 stocks in the same sector but that really wouldn’t be good portfolio management. Nevertheless, we have the freedom to do it by prospectus. Similarly, we have the freedom to invest in futures and options but we’ve never done that.

Q:  Would you consider investing in ADRs of large-cap international companies if they come up in your universe of 220 companies?

A: Yes, we have considered some ADRs. We have looked at Toyota when we sold Ford and General Motors. We do own British Petroleum because we have owned Amoco years ago. Overall, if we find an attractive ADR that meets all our criteria, we would probably add it. But our mandate is to be in domestic companies, so a couple of foreign names would be an exception rather than a rule. Investing in them would be only because we couldn’t find something domestic that was better.

Q:  What type of risk control measures do you have, in addition to the diversification and the limits on individual positions?

A: We like companies that are profitable and pay dividends. That approach definitely helps on the downside and that’s how most investors perceive risk. Overall, investors like to make money, but they certainly hate to lose it. The high dividend yield helps to absorb some of the shock that you sometimes see on the downside.

But our most important risk control measures are diversification, fundamental screening, and good old-fashioned analysis. It is crucial that we approach the stocks as businesses. I believe that we should understand the businesses and buy them for the long run. If you just treat them as stocks, you’ll hurt the total return of the fund because every time you buy and sell a stock, you pay brokerage commissions and taxes. Minimizing these significant costs is another way to manage risks.

Q:  What would be your approach towards large companies like GM, which is paying high dividends but doesn’t necessarily have the best management or strategy? Another example is a company like Kodak, whose stock has been a challenge.

A: We don’t own GM or similar companies because the fundamental screening takes them out. Regarding Kodak, we used to own the stock when we started the fund in 1995. It was also one of the first companies to sell because we saw through the business model analysis that its business was changing. The business was no longer about films but also about digital products. And while we thought that they would cope with the transformation and survive, we also acknowledged that their market share was not likely to stay at 80%. Moreover, the margins in electronics industry are much thinner than in the film industry.

When this phenomenon began to take place, we sold out our Eastman Kodak stock. Having in mind that our investors are risk averse, we saw no reason to own Kodak during the transformation of the industry. We have owned it, and if it copes well with the industry dynamics, we may own it again in the future. But we would rather stay on the sidelines during this risky period.

On the other hand, Sara Lee is also going through a change, but this is a selfimposed change that is going to make the company stronger at the end. It’s not a change that’s dictated by the market and competitors like Canon and Sony. Sara Lee doesn’t have to be reactive, it can be proactive.