Q: Would you start by giving us an overview of your investment style and general philosophy?

A: We are a small-cap growth fund that invests in rapidly growing companies that we have identified as being the leaders in their respective industries. The fund uses a team management approach with dedicated specialists in four broadly defined sectors: technology, business and financial services, healthcare, and consumer. Each sector has a team of two people that are responsible for all of the investments within that sector.

The teams are charged with identifying strong, fast-growing companies in fast-growing industries. Before a stock is recommended, the team does detailed fundamental research on the company and the specific sub sector of the industry where it competes.

Q: What criterion do you use to identify a fast-growing company and how large does a company have to be to be in included in your small-cap universe?

A: Since the definition of “fast growing” varies by sector and sub sector, as well as over time, each team has its own yardstick. For the consumer sector, we generally look at companies that have a top and bottom line growth of at least 20%.

Within the consumer sector, you don’t’ get really crazy swings in valuations even when a stock is doing well relative to its industry. For a 25 % growth rate, maybe you get 25 times earnings when the sector is in favor.

In the financial services area, you don’t find companies with growth rates that are this high – especially in the banking industry. But if you look at smaller niche areas, you can sometimes find financial related companies that have nice growth rates.

One metric we do use across all of the sectors is enterprise value: how much would the reasonable investor pay for this company. That is an important determinant for us in evaluating companies and the teams use it across all sectors. Another test we use is free cash flow. We look for companies that have a strong enterprise value to cash flow ratio.

As far as size, we consider companies with market caps less than two billion dollars to be small caps. We might go as low as 400 million dollars, but for many obvious reasons that is about as low as one would want to go.

Q: Could you explain a little bit about your investment process and how do you select a specific stock from among 10 companies that are growing at a 20% rate?

A: We are looking for companies that are not only growing rapidly, but are also leaders in their respective industries. That leadership could be based on a superior product, a proprietary technology, or even unique services that they offer. The company should have strong market share in the industry, and the market share should be increasing.

In the retail space, we are looking for companies offering unique and differentiated products. For example, there are many companies appealing to the teenage dollar, but we are putting our bet on names like Urban Outfitters that offer a unique shopping experience, proprietary products, etc.

We also look for companies that successfully erect barriers to entry. For instance, we’re looking for companies that have insulated themselves from Wal-Mart, because it’s very difficult to compete with Wal-Mart. Just look at the difficult time the supermarket industry is having. We focus on the long-term outlook for the companies rather than how they are performing right now. We try to determine how they will be doing over the 3-5 year time horizon.

Q: Once you have identified companies in a sector that meet your requirements, what is the catalyst that drives your decision to buy or sell?

A: By the time that we are satisfied that a company is fully qualified, the team has already accumulated a substantial amount of background information, research, and related analysis. That gives us a solid base from which to decide if their top line or bottom line is fully reflected in the multiple. If we think they are close to a peak we will watch from the sideline, but if we believe that they have the potential to increase growth, we may bite.

We also use various technical tools to help us in the buying decisions. And we work with our trading teams who are very experienced in the growth space. They are right on top of the markets and very good at helping select the best points to buy and sell.

While we do computer modeling and look at the results, we don’t rely on models for making decisions. Instead, we develop our own sense of what is likely to occur, and use the model results more as a reality check.

Q: Turning now to your research process, most managers seem to start with a screening procedure supplemented by fundamental research to generate a primary buy list. Is your process similar to that?

A: Well, no, our process is not really like that. We do not use screens. Instead we rely on years of experience of the team members. They have been working in their area of expertise long enough to intimately know all the companies in the space. They talk with analysts, attend conferences and IPO meetings and, in general, they are on top of what is happening in the industry. While they each follow an extensive list of companies, they don’t need a screen to identify the ones that are interesting.

Q: What happens when there is a disagreement within the team whether to buy or sell a stock?