Q: What’s the investment philosophy behind the fund?

A: We seek to provide consistent performance throughout all market environmentsand we have three goals that we balance at all times - dividend income, long-term capital appreciation and capital preservation. We think about those goals concurrently in everything we do, from portfolio construction to buy/sell and risk management.

Our philosophy is that undervalued companies that are returning capital to shareholders via both dividends and net share repurchases will outperform over a long period of time. In fact, every stock in AIM Diversified Dividend Fund pays a dividend and the fund also pays a quarterly dividend to shareholders. We adhere to a disciplined investment process in all markets which entails:

1. Determining those dividend-paying companies with strong profitability, capital structures and capital allocation policies that support sustained or increasing dividends as well as share repurchases.

2. Applying fundamental research to determine a fair valuation for each of those companies.

3. Investing in stocks of those companiesthat offer the most total return potential from price appreciation and future dividends, while also displaying characteristics that would imply the potential for long-term preservation of capital.

From a macro point of view, the correlation between dividend growth and earnings growth, which was negative during the 1990s, became overwhelmingly positive after 2000 in the post bubble period. Since 2004, we are seeing similar levels of correlation between dividend growth and earnings growth that we saw back in the 1960s. We don’t know if that will continue to be as strong, but we believe there will be a positive correlation going forward.

Q: In some ways capital preservation and appreciation are opposite ways of investing. Why do you think balancing these goals is important as a philosophy?

A: I think it is important because I strongly believe in the valuation framework. Often, stocks that are overvalued exhibit asymmetric behavior, meaning they react less positively to earnings upside than to negative earnings surprise. Doing a lot of work on the valuation framework helps us to achieve the preservation component. We are patient investors.

We will not overpay for anything. Good companies are not necessarily good stocks. During certain time periods a good company is a good stock, but not at all points of its economic cycle. We spend a lot of time looking at the allocation of capital that a company has historically demonstrated as well as balance-sheet metrics.

I’ve managed fixed-income for 10 years and I am as comfortable with balancesheet metrics as with income statements and that’s probably what makes our fund a bit different. We look at the free cash flow yield and its sustainability - where it’s coming from, how it’s tracking with earnings growth and where the discrepancy is.

Q: Could you describe your research process?

A: We break out along industry lines in terms of research and analytical responsibility. All members of the team are responsible for some sectors and some industries. We have a model built for every stock that we purchase in the portfolio. We have a two-year time frame and a price target on everything that we purchase.

We perform a discounted cash flow/dividend discount model on every company. We discount companies based on similar revenue mix characteristics. I also have a healthy respect for the market’s price movement in general, so the marketbased valuation work includes a relative analysis of the company versus itself over the past 10 years. We adjust for changes in the business model and then do an analysis versus peers. We come up with one blended multiple and apply that multiple to our two-year forward-adjusted earnings estimate to generate a price target.

For our watch list, we use proprietary quantitative screens, which are set up to assess financial strength, sustainability of profits and valuation. The quantitative screens help focus our attention on stocks to consider for the portfolio.

Q: What is the integration between the team and the portfolio manager?

A: Each of the analysts reports directly to me and we work as one team. We often have two people covering one stock – one lead analyst and someone who provides backup on the industry. I don’t believe in the model where the analyst comes pitching to the manager. Everyone does fundamental work and everyone has primary analytical responsibility on some names. I also serve as lead analyst on two sectors.

All the models are shared among the team and we review our price targets at least quarterly with the earnings release. The price targets are dynamic, but typically they do not change very much because we look out two years. I have final decision making authority over all portfolio transactions, but the analysts have significant input and independence.

Q: When you are a lead analyst on a specific sector, how does the process work? Do you have to pitch to yourself?