A: I think within each team there is a very healthy level of respect for each member’s views; but there are certainly times when one of us will feel more strongly about a particular decision than the other. In most cases, we pretty much go with the person that’s has done the work.

We always have two people covering each sector and often they will have differing views. Our experience has been that having someone challenge your views usually results in better decisions. Ultimately, it is the chief portfolio manager, Jerry Fry, who is responsible for the process. He continuously monitors the process and makes sure the things are running smoothly. Jerry has a strong background in the healthcare and technology sectors.

Q: There are two kinds of structures that I have seen in fund management companies: one where the analysts do their work and make a case to the portfolio managers who make the buy and sell decisions, and one where the analysts are the portfolio managers and make the decisions. Which structure would most closely describe your team approach?

A: Before we put our team structure in place, our process was similar to your first case. We had a group of analysts who were trying to find ideas to pitch to one of the portfolio managers. It was the portfolio manager who would decide if the name went in or out, and the analyst kind of lost ownership of the name at the playing time. Our current process is just the opposite.

We have eight people doing research. Six of the eight act as both portfolio managers and analysts, and two are analysts working with the portfolio managers. Everything about the consumer sector is completely controlled by the two portfolio managers. The team as a group does the research, works closely with the traders, monitors positions, and decides what to buy or sell. Overseeing the process is someone that sits on top and makes sure the things are running properly. Jerry’s role includes diversification and risk management. He acts like a traffic cop to make sure that the portfolio meets its diversification objectives and is in line with the portfolio’s benchmarks.

Q: Is this specific fund measured against any specific benchmark or yardstick?

A: The Russell 2000 growth is the one that we use as a benchmark.

Q: Would you describe and discuss your approach to diversification?

A: We diversify pretty much along the broadly defined sectors. Since we use a bottoms-up approach and we are not tied to a specific sector, the names that we own tend to be spread out among the sectors. We do strictly adhere to our 5% rule meaning that not more that 5% of the portfolio can be held in a single name.

The distribution among the sectors and sub sectors varies from month to month. We look at the returns by sector on a daily basis, and run a very detailed report by sub sector weekly using weighted returns. We want to know if our performance was the result of stock selection or sector selection.

We normally average about 80 stocks in the portfolio and our turnover rate is more than 70%.

Q: To better understand your approach, could you give a couple of specific examples of how you picked a specific stock, what thinking went into the selection, what happened with the stock, and then how did you end up selling it.

A: An example in the consumer sector might be Coach (COH). We still have the name in our portfolio so I don’t have the end of the story yet. We first saw the company presented at a conference three years ago. The company had been spun out from Sara Lee a few months before. They were transitioning into a fashion accessory business and had just launched for the first time a logo collection. Within a few weeks of opening the line in Japan, sales of that line had grown to 10% of their total sales. We saw the potential of the line as they moved into their other markets, and believed that it should be able to really move the needle. It has proven to be one of the great success stories in retailing in recent history.

While we did not predict how successful the company would be, as the story unfolded, each step got better and better. They keep expanding market share tremendously and widening their appeal all the way from teenagers to grandmothers. They have designer customers that are trading down to their bags, and customers that don’t typically go into the affordable luxury space trading up.

The company’s operating margin is more than 30 percent and continued growth have given it increasing economies in scale. They still have a lot of room to grow. Even in Japan, where they grew 85% last year, they still only have a 4 % market shares. The company believes they can expand that to an excess of 10% market share.

So at this point the stock has done well and has very healthy multiples; but you pay for scarcity value. There is not another consumer product company out there that has margins over 30%.

Q: And why do you continue to own it?

A: When we look at the continuing sales growth and see numbers in the high 20s and lower 30s, it suggests the company still has tremendous momentum behind it. We have seen their new collections and feel that they should resonate well with the customers.

Q: Do you have an example in the non-retail sector?

A: Perhaps Protein Design Lab (PDLI) in the biotechnology industry would be a good example. The company specializes in monoclonal antibodies. While they didn’t have their own pipeline, they had the technology to humanize antibodies. It is a company that we believe has a terrific future. Historically, antibodies used in the manufacturing process were from mice that can sometimes cause an adverse reaction because they weren’t human. Protein Design Lab technology is a technology to humanize the antibodies to therefore make them acceptable to humans.