But the important thing is that we’re studying these industries through the lens of the strategies. Frankly, I don’t need to know all the personalities of all the management. I think Wall Street often gets a bit too enamored with personalities, while we just follow the industry conditions. That keeps us less biased and we can plough through a lot more information. We use Wall Street research but only because it’s a great source of data, not because of the opinion or the short-term recommendation.

Another differentiating factor is our unique incentive structure that is a risk management tool and makes us very bottom-up focused. We’re paid on the stock picks that we have made, so we want to do a lot of due diligence to make sure that our stake in the portfolio has a good upside/downside ratio.

Q:  Would you explain the portfolio construction rules that you follow?

A: As a small-cap fund, our benchmark is the Russell 2000 index, but we’re not benchmark sensitive. We don’t have rules that govern our underweight or overweight. The analysts are motivated to bring their best ideas, and if those best ideas result in a significant under or overweight in a sector, we’re happy with that. Our stakes just reflect the fact that the analysts are incentivized for absolute returns and best ideas, not to buy for the sake of looking like a certain benchmark.

We have about 100 holdings, each averaging about 1% of the portfolio, but that varies. Running a small cap fund poses certain challenges, such as concentration and liquidity, and we are not taking significant stakes in any individual company. But that’s not such a big issue nowadays as a lot of small caps are defined in the billions of market cap. The turnover of the fund is about 40%.

Q:  What is your view on risk control?

A: I think that our investment process naturally controls risks and it’s our biggest risk control. We don’t look too much at things like tracking error. We do have a quantitative strategies group internally that provides portfolio metrics for us, but we’re stock pickers and we want a portfolio compiled by our best ideas. So we let the process govern how we monitor risk at the individual idea level.

With that being said, we are well aware of our sector weights and the index to determine some underlying drivers. If we see a sector that’s performing and we’re underweight, we’ll have discussions at least to learn more about it. But ideas come from bottom-up analysts, not from wide sweeping macro calls that could really be wrong.

One of the byproducts of our investment strategy is the fact that after we’re done following a stock, we develop monitoring points. These are the key factors that drove our interest in the stock and we follow them to make sure that the story is consistent and is within the framework of our strategies. That keeps us governed when to buy and when to sell and not to get too emotionally attached to a stock.

Our recommendations go through multiple drafts and our colleagues help us weed out problems and focus on the true questions to ask and monitor. When we recommend the stock, there is a voting process and a review team. The portfolio managers are in constant contact with analysts to discuss questions and views. But the analysts are the ones keeping track of their ideas and staying on top of them. Once an idea is approved, the analysts maintain responsibility and the performance of that stock is in his compensation. At the end of the day, the portfolio reflects the composite of the best ideas of our team and we’re comfortable with that.