A: We have four sector-based analysts. Our analysts focus on the consumer discretionary and staples, healthcare; financials and utilities and energy and materials. My experience was analyzing technology at GE Asset Management. I also help on the industrials.

Having sector specialists allows us to think outside the traditional Wall Street mindset. I’m thoroughly skeptical of Wall Street, partly because where they’re very short-term transaction driven, we’re long-term value driven.

Q:  Generation of ideas can come from many places, including media reports, screening process or keeping up with trends. What’s your way?

A: We use all three and a fourth one, networking with companies we know well. The networking part is about talking to various companies about them and about other companies. Not every management team is willing to do that, but the smaller the company, the more they might be willing to talk.

Q:  Would the pharmaceutical industry have a better profile in your view?

A: We still think about it from a valuation standpoint. The large-cap pharma names still have high ROIC levels. Aside from Johnson & Johnson, which is a different story, we don’t have any exposure to that group. Their EV/IC ratios have come down as their ROIC levels are decelerating. They’ve had all these branded drugs with patent protection that earn incredible returns, but they’ve been their own worst enemy. They’ve grown too large to repeat this growth and that is combined with losing patent exclusivity.

Q:  How do you approach the construction of this concentrated portfolio?

A: Our position sizes reflect our level of conviction. When you’re running 30 to 50 names, the weight per name is somewhere between 2% and 5%. The maximum position size is nothing greater than 10%. Anytime a sector is greater than 10%, we generally try to limit ourselves to 2 times that weight, and any time a sector is less than 10%, we don’t exceed 5 times that weight. From an industry standpoint we limit ourselves to no more than 25% in any industry. We make sure that we stay within the risk control parameters to manage a diversi- fied portfolio.

Occasionally the markets give us opportunities. First Marblehead, the private student loan lender, is a perfect example. We were reviewing the company one day when news came about a transitory problem. It had already come down from $75 to the high $30s at that point. It was like a gift in terms of the hit that the stock took that day for something that didn’t matter from a long-term standpoint.

First Marblehead’s competitive advantage is the TERI database which includes 18 years of underwriting data. This database, in our opinion, provides them the ability to underwrite student loans better than anyone. This is an example where we started with a fairly small position, and as our confidence has increased our position has grown. We just don’t believe the negative stories out there.

Q:  Do you benchmark against any index?

A: We use the Russell 1000 Value Index.

Q:  What is your objective in terms of turnover?

A: While we do not manage the fund with a specific target turnover in mind, we have over time ranged between 20% to 60%. There are some periods where we need to trade little, in other periods the market may reflect the opportunity we see more quickly.

Q:  How would you describe your buy and sell discipline?

A: In terms of sell discipline, we have three reasons. First we sell ‘if something dramatically changes’. Using First Marblehead as an example, such change could be if their advantage in underwriting student loans changes. That would be a pretty easy sell decision for us. Second, the more difficult one, is where the market fully reflects our valuation upside. And finally if we find a better opportunity in another name.

Q:  What kind of risk do you perceive in terms of the portfolio, the sectors, or the security investments? How do you try to minimize that?

A: This is not something that we create hard fast rules around, but we think about it in this context: if we had owned ideas in just one sector, for example, we could have substantial risk if the world changed dramatically. Therefore, we focus on selecting securities from a bottomup basis across all sectors. This tends to diversify the portfolio. And we tend to not limit where we can find value. You may have to look a little harder in certain places but this can diversify your overall portfolio risk.