A: Traditionally, Western New York is viewed as the place for past industries as opposed to future industries. The most famous industries that we've had are the industries that have had the most problems. For example, Bethlehem Steel was a big employer in Buffalo and now it is no longer there. Kodak, a big employer in Rochester, is now off the Dow Jones Industrial Average and its stature has diminished among analysts.

In terms of the growth industries that we're seeing, the biggest story is the advent of Paychex. Their focus has been in smaller companies and the smaller companies tend to grow even in economic downturns. Or at least they don't suffer such big swings as larger companies do. That has protected Paychex on the down side and has allowed it to grow.

Q: What industries do you diversify across?

A: We are looking at a slice of almost everything. We have neither avoided nor concentrated in any industry. We are well diversified for a fund that only has 250 stocks to choose from, although there are certain industry segments that are totally not represented in Western New York.

Technically, the SEC says if you're a regional fund, no less than 80% of your portfolio has to be invested in the target region. So our board of directors decided that some portion of that 20% ought to be used to make sure that the portfolio is diversified across industries, but not all of it. In practice it has only been between 5% and 7%.

Q: Could you describe your buy/sell disciplines?

A: When we identify a target company, we don't look at the price until we're comfortable that the company is financially sound. Once we've concluded the company is financially sound, we need to make some sort of valuation determination on that company. Asset based valuation is often very difficult, especially for the smaller companies where there's not a lot of public information available. That's when the behavioral finance techniques become most valuable. We look at price to sales, price to earnings, price to book and various financial parameters that are essentially price ratios. Then we look at the historical trading range the stock has been in and what might have caused the different shifts in this range and where we might be along that cycle. From there we will determine a severe market low and a 5-year target sell price.

These are our two extreme points. Within those extremes, we come up with a buy price and a 2-year sell price. The 2-year sell price doesn't mean we'll automatically sell it after 2 years. Rather, it tells us where the stock price has to be after 2 years in order to get to the 5-year return we initially expected. If a stock does hit a 2-year sell price, say, within 9 months, we'll take another look at it. If we still have the same 5-year price on it, we might sell that stock thinking we can buy it back later and still meet our return target. Part of the buy/sell equation we've developed includes some sort of down-side risk assessment. That's why we would end up selling that stock if it's gone up faster than we anticipated for no reasons that we could determine.

If there's a significant downside risk in a stock, we compare that stock with other stocks and pick the one with less downside risk. Likewise, if we have two stocks with the same downside risk, we will invest in the stock that has a higher upside potential.

We use these historical behavioral pricing trends plus the current price to determine where a stock falls on our watch list. We've had to develop our software to monitor trends and we are very disciplined in what we do.

Continuing with the process, let's say we have now received new information on a stock. This leads us to re-determine the buy/sell prices of that stock. However, because we're relying on information that is basically quarterly as opposed to hourly, we're certain that any particular quarterly number is probably not going to change our long term analysis. There might be something fundamental that would change our thinking, but in the typical quarterly reporting you'd rarely see something change.

Q: What are your views on risk and how do you mitigate those risks?

A: The greatest risk is failing to meet your goal. Ironically, this has nothing to do with relative performance, indices or SEC-mandated performance reporting periods. We are not looking at fund volatility as measured by standard deviation as risk. If your goal is 10%, you have two scenarios – one, where you miss your goal by 5%, so you only earn 5%; the second, you surpass your goal by 20% and you earn 30%. For most people, common sense says missing the goal holds the greater risk. Modern Portfolio Theory, however, by defining standard deviation as a risk, considers the 30% return as the greater risk because it exceeded the mean by a multiple of four times more than the 5% return did. Well, we reject that; we are more concerned about the downside risk and that is reflected in the way we buy and sell securities.

We are intuitively more aggressive because we are limited in the number of stocks we can choose from. There's always the concern this limitation may hinder the performance of the portfolio. Fortunately, that hasn't happened. In terms of traditional risk you would have expected us to have higher beta or volatility and thus fall down more than the market, but, in fact, in terms of that measurement we didn't. So, Beta is not really our measurement of risk, either. Our measurement is each individual purchase and whether it has got a downside risk we're comfortable with.

Q: Like most absolute return funds, do you have any returns target?

A: From the SEC standpoint, every mutual fund has to identify a benchmark index. Our benchmark index is the Value Line Geometric Index and that's the one that's most consistent with our original universe of stocks as a multi cap fund.

Individual stock purchases have their own return targets. The most aggressive target has us buying a stock only when we think that we can sell it at a double within 5 years. The most conservative target has us basically just beating inflation.