My role is to put the analysts’ ideas in the portfolio in a way that ensures an above-weighted market position, but also a portfolio that’s relatively balanced. While we’re stock pickers, we diversify our portfolio for risk control purposes. We don’t put more than 12% in a given industry and limit our positions to 5%. The largest of the large-cap growth companies are more heavily weighted than the smaller large-cap growth companies.

But we don’t constrain the portfolio for sectors as we do for industries. The general guidance is just not to do something that would be imprudent. For example, when in 2000 the Russell 1000 growth was above 50% in technology stocks, we thought that such concentration would not be a prudent decision, so we held our weighting back.

Q:  What is your view on risk control?

A: Overall, we’ll look at individual stocks and the industry breakdown to make sure that we are not overly concentrated in a given industry. We make sure that we get enough diversification and we pay close attention to individual stocks to keep a reasonable balance without undoing the benefit from the individual stock selection.

But the primary risk control is at the individual stock level and that’s in the sell discipline. Once the stock is purchased, it’s monitored by the management team and by the analysts on an ongoing basis. The buy and sell targets can be adjusted for new information and we’ll act in accordance with those targets.

If the stock reaches its target price and there’s no justification for raising that target, the stock is a sell candidate. When we see the fundamentals and the outlook deteriorating on an ongoing basis, that’s a reason to sell or reduce a stock. We follow various technical inputs such as relative strength, price volume characteristics, and insider transactions as key criteria for discerning violations for selling. And finally, every week we evaluate if the new names on the list could be replacements for weaker stocks in the portfolio.

Q:  What is the fund’s turnover?

A: The turnover varies and we don’t target a specific rate. It can be as low as 60% in some periods and as high as 125% in other periods. In periods with major rotation away from a group, like in 2000, the turnover is going to be higher. In years like 2005, when you’re in the middle of a cycle, the turnover will be lower, so it is determined by the individual stock, the sell discipline, and where we are in the market cycle.

Because of our risk-averse nature and our risk-control techniques, we tend to take small and short-term losses, while our gains tend to be longer-term and larger. We don’t specifically manage for tax efficiency but the process tends to hold the winners and take small losses on stocks that don’t perform well.

Q:  What do you think is the major differentiator of your strategy?

A: I believe that the strength of our process is at each different level. We look at more stocks initially because of the quantitative screens, and then, we’re consistent in the way we buy stocks. When we identify candidates, we don’t stick only to the members of a particular index but we determine ourselves if it’s a growth company or not.

For instance, we purchased several energy stocks before they became components of the Russell 1000 Growth index as they were clearly demonstrating consistent long-term growth. On the other hand, there are a lot of stocks in the index that no longer comply with the growth criteria and we avoid them. In many cases they fall out of the index later and the index funds end up selling them.

A major advantage is that we look for both fundamental and technical strength before we consider a stock. Often you’ll only have one or the other and that can lead you into stocks that are poised to deteriorate. With the quantitative work, we try to build a very small universe of candidates that has a high probability of being successful. In the qualitative part we look at specific criteria that add value. The buy and sell targets keep us focused even if we adjust them. I also believe that it’s good to have input from Wall Street brokers and other sources, but it has been particularly helpful through the years to have in-house analysts.