Q:  What is the philosophy driving your investment decisions?

A: As the name suggests, the fund tries to provide balance between growth and income. It is diversified across different strategies and styles and in terms of market cap. Our holdings are divided approximately between 60% to 65% equity and 40% to 35% debt instruments.

Within the fixed income side, there is diversification between high-grade corporates, agencies, Treasuries, and a component of 5% of convertible debt. The equity part is also fairly balanced. My approach is to have some growth, usually at reasonable price, and some value, because it is difficult to predict which style will outperform over the next few years. For the same reason, I have a multi-cap strategy.

Q:  Can you describe your perspective of growth?

A: I tend to be a GARP investor and to a degree contrarian. When earnings multiples get too high, even if the companies are great, all the growth potential is usually built into the stock. My strategy is to buy growth stocks earlier, before they are fully valued. When expectations are high, if a company misses earnings even by a penny, the stock can fall by 20% in a day. I try to avoid this and to build a better risk/reward profile. But with the rise in value in the last few years, the differential between value and growth stocks is not as big as before.

Q:  How do you implement this philosophy into strategy?

A: The first thing is the GARP strategy and looking for good, stable, growth potential and moderate PEG ratios, usually in the 1 to 1.25 range. I also look for balance sheets with less leverage, or for companies that are more defensive than their peers. Another factor I take into account is the enterprise value to sales ratio.

I usually look for dividend-paying companies, which comprise about 70% to 80% of the equity part of the fund. One of the reasons is the tax advantage. But more importantly, dividend-paying companies tend to be more stable, with more dependable accounting and free cash flows.

In terms of quality of earnings, I try to avoid companies with a lot of stock options because they dilute earnings. Pensions are another big issue, especially at the older industrial companies. They have significant underfunded pensions and I avoid this longer-term problem.

Lastly, I avoid the companies that are constantly taking one-time charges or as some have called them serial restructurers.

Q:  Can you explain your research process? How do you generate ideas?

A: We run weekly screens on the basic ratios looking for new companies. Also, I spend at least a third of my day reading news publications, newsletters, and various sources of research. That results in another half dozen or so of names every week.

Once I have found something of interest, I decide if this is an area that I want to add to. I am not particularly worried about the weightings in the S&P 500, but I don't usually get too far away from them. Often a macro issue may be the reason to reduce or overweight a sector. Currently, I have only about half the weighting of the S&P 500 to the Finance sector since I am not very sanguine about the effects of rising short-term rates, the flat yield curve, and the exposure many of these companies have to the housing and mortgage areas.

Q:  Growth investors usually have a forward-looking view, while value investors place more importance on balance sheets, historical earnings, and cashflows. In your experience, which approach is more valuable?

A: I like to think I use both these types of investment styles and a blended approach is really more effective. Hopefully, most of my investments meet the requirements of each of these styles. I also believe being somewhat of a contrarian helps. For me the best way to make money is thinking about the best risk/reward in a long-term perspective. I take the consensus view and try to figure out where people are overly optimistic or pessimistic. A good risk/ reward scenario tends to include some negativity on a company. When everyone is very positive, maybe the stock has another six months to run, but it could be a difficult long-term holding.

Q:  Why? Because it is prone to accidents?

A: Yes. Unfortunately, when expectations are high, the stock easily becomes fully valued.

Unfortunately, analysts tend to extrapolate the growth from the past year into growth rates for several years ahead, while this may have just been unusually good year.

On the other hand, in energy for example, analysts constantly underestimate the earnings power there. This is a theme that I have benefited from the last few years. The price of oil can fall from $60 to $50, but some of the companies I own are selling oil in the mid-30s because of past contracts that will expire. For some reason, the analyst community hasn’t picked up on that.

Q:  Does that situation apply to homebuilders also?