A :We have a hard limit of 40 companies in the portfolio. This relatively concentrated position provides a balance between diversification and stock picking impact that we prefer. However, this does create a perception of high turnover in the fund. Our annual turnover will range between 25% and 100%; the most recent turnover ratio is 50%, through February 2005.

Q:  Can you please discuss a company that you like that is not in the exploration and marketing area?

A : Valero Energy, which owns and operates 15 refineries, is one of our largest holdings. The company serves a crucial bottleneck in the oil production chain—refining crude oil into products for end markets. Crude oil must be refined in order to be sold on the market; despite higher demand for gasoline and other refined products, there hasn’t been a new refinery built in the U.S. in nearly a quarter century. Further, the additional capacity that’s being brought to market today, and the new discoveries likely to be found tomorrow, are lower-quality heavier crude. Heavier crude typically trades at a 10% to 20% discount to the lighter and sweeter crude in the market. Valero specializes in processing this heavier crude. We believe that the capacity to refine heavy crude gives them an advantage to leverage into higher revenue and profitability. Historically the refining industry has not done well and major oil companies have not done well financially in this sector. As a result, the sector has been under capitalized and underinvested.

Q:  Could you elaborate on your research process?

A : I spend 35% of my time doing primary research. I visit companies and meet management in formal and informal settings. Analyzing numbers is important, but close monitoring of management is equally important. Our research process is geared towards limiting market surprises and avoiding stock meltdowns. We are looking to invest in companies that have strong balance sheets, cheap P/E ratios and a business that is generating at least a 20% rate of return on investments. In the event if our stock pick does not meet our performance target, then we look for a replacement. We will not sell a stock until we find a replacement.

Q:  What are your risk control measures?

A : We are diversified across several industry segments, market caps, and geographic segments so that we can avoid market surprises. We do not hedge currencies or participate in purchases of oil futures. We feel that the companies that we invest in are conducting necessary hedging. We closely monitor the industries and companies in the portfolio, talking directly with management and with industry experts. We will maintain a small cash cushion, usually less than 5%, so that we are not forced to sell stock in a market downturn.

Q:  Do you hold macro view for the industry and oil and gas commodity?

A : Fundamentally, we believe that oil and natural gas commodity prices will be higher this decade than they were in the 1990s. This view is driven by our outlook on supply and demand balances, refining and processing capacities and capacity utilization. We believe that we are depleting energy at a rate faster than the replacement rate. We are forced to look deeper and deeper into the ground and ocean and in areas that were once politically unreachable. So we are constantly looking at new technologies that help us to reach oil and gas fields in the areas that are harder to reach with the conventional technology. It is one of the exciting investing areas that is not linked to energy price volatility.

Q:  Could you provide us with one specific example of a successful stock pick?

A : Murphy Oil Corp., the fund’s top holding, is one of our long-term favorites. It has an increasing production profile through the end of the decade, based on the company’s estimates of its latest oil discovery in Malaysia, which should come on line in 2007. Another recent discovery in Congo will likely show results over time.

Second, its joint venture with Wal-Mart should continue to provide high throughput at relatively low cost. While gasoline margins are fairly thin, this deal provides them with the ability to make money from the exploration and production channel as well as the refining and marketing channel. Finally, we believe the management team has developed and executed a strong business strategy, and it has a history of shareholder friendliness. Further, the company is about 20% owned by the Murphy family, which gives us further confidence in the long-term prospects.