A: There are three things that can trigger a sale. First, if there’s a significant negative change in the company’s fundamentals to the extent that we no longer think it’s the company that we thought we owned. In that case we’ll sell the stock with no questions asked.

The other type of change is valuation oriented. We have different buy disciplines for our absolute and relative types of companies and if our upside valuation targets are met, we’ll simply pull the plug and look for better value.

The third factor that can trigger a sale is if we’re able to find a better idea. For example, a year ago we thought that pharmaceutical companies were approaching an interesting valuation level. They clearly had some issues with product liability so we didn’t want to bet on just one name. We bought a package of pharmaceuticals - Abbott, Merck, Eli Lilly and Pfizer. We recently sold our position in Merck and moved the money into Pfizer and Lilly, which had reasonably comparable valuations but not as much baggage as Merck did with Vioxx. It wasn’t a new idea, but we were more comfortable with the alternatives there.

Q:  You mentioned that you aren’t interested in what people call ‘deep value’ or ‘turnaround’ situations. Why?

A: We look at turnarounds, but we like to be sure they are in fact turning around, because frequently they don’t. Whether we’re more heavily skewed towards the absolute or the relative value camp will depend on the market conditions at the time. For example, in 1999 and 2000 we had an oddly valued market with exceedingly high valuations of tech stocks and attractive valuations on almost everything else. In that case we were much more in the absolute value camp.

Within the absolute value camp, I would not classify us as a deep value or a contrarian manager. Typically, the quality characteristics of the companies that we own are higher than that. Instead, I’d classify us as a more opportunistic manager as our emphasis often will be a function of the market. As the market has moved forward in the last few years, many of the relative value companies have come down in valuation. In the last 5 or 6 years, our shift has been in the direction away from more of the absolute value names in favor of the relative value companies.

Q:  How often do you change the mix in the portfolio?

A: Our long-term turnover ranges have been in the neighborhood of 20% to 50% depending on the market. About 35% is probably a rough average annual number.

Q:  In the last five years large-cap growth hasn’t done as well as large-cap value, although that depends on what sectors you have been invested in. Do you expect a shift to eventually occur?

A: I’ve often told our clients that we’re much better at forecasting the future than we are at forecasting the future accurately. It is very difficult for me to make predictions and I think that every market cycle is different. One of the things you come to realize with experience is all market cycles are different. We’ve been fortunate to have had success over a long period of time, including the recent years, relative to our peers and to some of the large-cap growth guys. So I don’t know where it’s going to end up but I do know that our approach has flexibility with a clear value bias. The opportunistic nature of the fund hopefully gives us a competitive advantage.

Q:  In the large-cap universe do you generally stick to U.S.-based companies or you would look at foreign names as well?

A: We invest primarily within the U.S. but we own several ADRs. We’ll only own the big household names such as Honda, Royal Dutch Shell Oil, Unilever, and Cadbury Schweppes, because we’re getting better numbers from the companies. They comply with international accounting standards and this makes the research process to our liking. So we have a handful of ADRs, but they’re always going to be a handful and they’re always going to be names we’re familiar with. We’re not trying to be an international investor.

Q:  There are several mega-cap stocks, like Microsoft, that haven’t been in favor with investors for the last five years. Is that part of your research process?

A: Generally, those types of companies would fall under the relative value umbrella. We’re always looking for companies with growth but the real issue is the valuation. As former growth companies struggle in the marketplace and their stock prices go down to what we think is a compelling valuation level, we’re willing to pick and choose those types of companies.

One of the things that we do see in the marketplace right now is a compression of valuation. There are many companies of good, average, and high quality that are all trading around 16 to 18 times earnings, and that’s an environment that gives us the opportunity to qualitatively upgrade the portfolio.