Q:  What is your investment philosophy?

A: We believe no one knows the future or where the winners of tomorrow are likely to arise from. However, our investment philosophy is pegged on the belief that there are 5 essential areas, real estate, raw materials, energy, bonds and capital markets, on which people, the world over, will spend or invest irrespective of the market situation. We believe that a diversified investment strategy and asset allocation that encompasses wider asset classes, beyond stocks and bonds, are the keys to performance. We also tr y to gain up to 50% international exposure within each theme, when such opportunities exist.

Q:  How does this philosophy translate into investment strategy and process?

A: We look at the 5 essential themes from a macro standpoint and tr y and divide the holdings equally among the five sectors that we think each portfolio should hold. Namely we have bonds, stocks, energy, raw materials and real estate. This strategy is applied in the management of our two five-sector mutual funds structured as funds of funds - the Giant 5 Total Index System (NASDAQ Ticker INDEX) and the Giant 5 Total Investment System (NASDAQ Ticker FIVEX). Both funds are identical in investment strategy. The only difference is that in the Giant 5 Total Index System uses index driven exchange traded funds and Giant 5 Total Investment System or FIVEX uses managers.

We have both portfolios side by side, being traded and managed identically, except for the fact the underlying engine for FIVEX costs more because we have to pay for the managers; whereas the Exchange Traded Funds or ETFs, held in INDEX, create a cheaper engine. We are thereby matching the experience, intuition and skill of managers against the efficiency of low cost in diversification, in INDEX. So it is kind of using actively managed funds versus the passive indexes.

We have broken away from tradition asset allocation with our 5 Essential Themes. Most portfolios favor large caps, believing they are safer and have less risk. We believe technology has irreversibly changed the competitive landscape over the past 10 years by giving smaller cap companies the tools to compete more effectively and bring out quality products. We therefore take a more sector-based approach and look at what we call ‘pocketbook investing’ or where the consumers are spending their money.

Q:  Why did you arrive at only those five themes?

A: A look at a person’s budget on any given month will reveal that more than 80% of the spending will fit into one of the five categories. However, there is one potential sixth category that we do overweight and that is technology. We believe it is interwoven in all of them and we hold it in our capital market category in our portfolios. We look for funds that will outperform in the down market and not just the best performing funds in five asset classes.

Q:  How do you select a manager appropriate for your FIVEX fund?

A: We have 39 performance screens that we use in FIVEX to select our managers; we call it our “All Star Selection Process” in which we prioritize performance. We value long term performance more than in the short term and value performance in down market more than up market; and also look at the manager’s tenure. Then we crunch the ratios for tax efficiency of the portfolio. Fees are an important factor, though we will not compromise performance for the sake of fees.

Q:  Can you give an example to illustrate the importance of performance over fees?

A: Black Rock Energy recently came out with their global resources fund and we jumped at the opportunity to own that in the portfolio. We were excited as it had one of the best manager teams in the energy space. There was one major hitch: fees in that portfolio were over 1%. A close competitor, Vanguard, that we own, has an energy portfolio for 21 basis points or 0.21%. When we ran the Black Rock Energy portfolio side by side with Vanguard through all the 39 screens, Black Rock looked superior to its peers.

The fund fee still remains one of our top ten screens because we do weight the 39 screens differently. Fees definitely get a higher weighting than other screens that we have in the portfolio in our All Star selection process, but we also look at all other ratios. For example, in our FIVEX portfolio we will not buy a new manager unless he has an extensive track record in the asset class he’s currently managing. It is fine if he opens a new fund as long he has a historical track record that we can measure.

Q:  How do you plan to tackle the fee versus performance hurdle?

A: One advantage we have is our access to institutional managers especially through FIVEX. We buy into the funds that are available to institutional investors, for our retail investors, at a lower fee. Our fees are 1.35% and our goal is to lower them to 35 basis points. We want to take fees completely out of the equation. This is possible only if we have both investment architecture and an independence to go to any firm in the world and pick the best managers that are available.

We plan to lower our fees down to 35 basis points as our assets grow. At $150 million, we are going to cap fees at 95 basis points; ultimately reducing fund expenses to 35 basis points.

Q:  What are the key elements of your research process?

A: We have an independent architecture that gives us the freedom to choose best available managers for the funds. In the index space where you have ETFs, the independent architecture helps because people are choosing from ETFs. In our FIVEX portfolio, this isn’t the case. Our goal is to select the most appropriate managers for the portfolio and our independent architecture is designed for this freedom of choice. When I was at Smith Barney I could not recommend Vanguard to my clients simply because Vanguard did not have a dealer agreement with Smith Barney.

In terms of research, we use anyone who tracks performance; we use Morningstar and S&P 500 databases. With the influx of over 300 ETFs in the past year, we are conducting primary research because many industry databases are still in their early stages of collecting information.