Overall, our research goes into what we consider to be the important issues for the company, industry and sector. We do our best to get the background, talk to the right people, see how the products are placed against other products, check the store quality, or the manufacturing quality, etc. It depends on what we consider the key issues in that particular company.

We have a team approach with three portfolio managers. The other portfolio managers are Keith Stribling and Todd Towenstein and each team member has an equal vote on the stocks that pass our screening process after the due diligence is complete.

We don’t visit a lot of companies but we have a fair number of managements coming here. We have research staff in San Francisco of six people with industry assignments, so we always check our knowledge with them. Usually, we can move pretty quickly through the research if we can get an answer to the key questions. For some stocks it may be only a day or two, while for others we may delay the purchase as long as a year if we are having trouble finding the answers to a significant question.

Essentially, our process represents a combination of a top-down and a bottom-up approach. We think that it is important to know what’s going on in the world. For instance, about five years ago we believed that industrial America would be a good place to invest because it had been under a cloud for a long time and valuations were low. We felt that the dollar had been too strong for too long, and when it became weaker, it would help many US industrial companies compete in worldwide markets. We had been in a strong consumer environment for some time and we expected the excitement to go away from that area of the market and that investors would be looking for other areas. Our overweight in the industrial area was combination of our top-down view and the companies that showed up meeting all the requirements of our process.

Q:  What are the most important elements of the portfolio construction process?

A: We’re broadly diversified and we benchmark to the S&P 500. We usually hold 60 to 90 stocks and our largest positions are typically in the 3% area. We target 1.25% per holding and when it performs well, we may keep buying up to 2% or more. If it goes up to 3%, that’s usually because of appreciation. We typically start with half position and keep building it as we learn more. Our turnover has always been low, usually between 10% and 20%. It’s been very stable and I wouldn’t expect it to change much.

The fund has always reflected traditional value characteristics. Our portfolio’s P/E and Price to book ratio is maintained below the that of the s&p 500 and the dividend yield of the weighted average stock holdings is about 50 basis points above the index. Those have been very consistent numbers.

We have a 10% limit on sector over/under weights. For example, if energy is 12% of the index, it could be as low as 2% or as high as 22% of our fund. That’s leaves a lot of room to cover most situations.

Q:  What are the major risks you perceive and how do you mitigate them?

A: We do all the tests on various metrics, including standard deviation, beta and tracking error, but I’ve always felt that the biggest risk is buying a stock that can come apart. So the most important risk control is the price we pay and really understanding what we’re buying and its underlying asset value and earnings power. We spend a lot of time trying to make sure that we understand the company, its sources of income, and the things that could change dramatically. It doesn’t mean that we cannot make a mistake, but when we do, we’ve got some pretty careful rules in terms of the price we pay to help protect us.

Constructing the portfolio through buying stocks inexpensively, expecting most of them to go up, and keeping your risk on any name limited, is a major part of our risk control. We believe that the overall selection of good value gives you above average performance over time. We never try to stretch too much and we have rules that keep us from taking too much risk.