We generally have fifty to sixty names in the portfolio and that, by definition, keeps us relatively diversified. We are trying to keep the portfolio roughly half in the bottom-up and half in the topdown. That can vary depending on how strongly we feel about certain things at a particular time. If we felt like there were three powerful themes, we may steer more towards 70%, but we want to keep a balance in bottom-up and topdown ideas.

Q:  So you have two elements that are drivers in your strategy - one is the bottom-up and the other is the top-down. We did get a flavor for top-down, and maybe you can also give some flavor for the bottom-up.

A: There are plenty of stocks in sectors where there isn’t a particularly positive outlook. We would use technology as an example. Hewlett-Packard is a stock that we still own, and we profited from. That was based on an idea of a company that was mismanaged for many years, and new management and a restructuring story. The top line hasn’t materially improved. It’s staying at around 5%-6% range, but you have had a much better cost cutting and management of the business than ever before. This was something we identified early.

Meeting with the management is another important thing, especially on these bottom-up ideas. It is a bottomup pick where we felt like the consensus was thinking that this company is out and in a couple of years might earn $2. After meeting with management and monitoring their performance over a couple of quarters, we felt that they could make towards $3. A lot of times when you have a company that has been down in the dumps for a while, you have a management change and the key is assessing new management and determining the probability of effective execution, and what would that leave you with versus expectations.

Whether it is a top-down or a bottom-up idea, the commonality between the two ways that we arrive at an idea is that at the end, the stocks that we own are likely to have varying performance that surpasses current expectations.

Q:  Generally, what is the turnover in the fund?

A: We think it will probably be in the 50-60% range, consistent with a twoyear holding period for the stocks. It is roughly the same in terms of turnover for the names. We manage position sizes a little, but two years is a very good holding range.

Q:  What do you do in a situation when stocks move because they are to be added or dropped from the S&P500 index?

A: We look at where the benchmark is in terms of sector weightings, but we don’t use the benchmark to drive our sector allocations. If you look at our portfolio of 50 to 55 stocks, we could only own 10% of index and our portfolio is going to look quite different from the index. Obviously, if something is becoming a bigger part of the index and it is driven by fundamental reasons, we are going to pay a lot more attention than if it is driven just by sentiments in the marketplace. Stocks move all the time when the S&P500 adds or detracts stocks from the index but we don’t really pay a lot of attention to that. We look at it as a general guide to where the market is positioned.

Q:  Do you look at ADRs of foreign companies?

A: Yes, we do. We can have up to 20% of the fund now in foreign domiciled companies. We look at the index as sort of a risk management tool, but it really has zero impact on securities selection, because we’re focused on earnings power of the companies exceeding the expectations. T

Q:  What kinds of risks do you monitor and what do you do to mitigate them?

A: Besides what we talked about on sector weights, position sizes and number of names, when we buy a stock we take a view on where we think the long-term earnings power is and we monitor that over time. Our risk assessment is in judging it as the quarters unfold, as we meet with management, as we do our day-today research, and our internal research staff does the same. We monitor how this earnings projection that we have is correlating with what is happening in reality. When there is a break in trend, we study it and see if it is just a glitch or whether there is a material change. If there is a material change then we are likely to sell the stock. We do not usually change the thesis to try and justify the holding. That is how we consistently try and manage risk in the fund.

Q:  Could you give an example to support your view?

A: For example, we used to own Dell Computer in the portfolio. They had a couple of quarters where they missed earnings estimates on the short term but we don’t initially sell just on that. After studying what the company was saying and understanding how the industry was changing and after meeting with management, we thought that the earnings power was going to be much lower than what we had earlier thought, and we sold the stock. So, we manage risk from a standpoint of our fundamental belief on what drives stock prices.

As far as managing risks and as far as concentration, we do that through keeping an eye on where the benchmark sector weightings are, and keeping roughly 50 to 60 names in the fund. Typically, a single position won’t be more than 5% of the fund. We have position sizes now up to 4% of the portfolio, but we continually monitor positions and make sure they don’t get out of line. That helps mitigate some of the risks.