A: If the only thing you can do with your cash is to buy all of your own stock, you would be liquidating the company. You ought to be able to find something business-like to do with that cash. But we have to be pragmatic and recognize that all investors don’t look at it that way. Some consider it to be one factor that might make a stock attractive. Also, if the repurchased stock goes up and if the company decides to have a secondary issue, they can make a profit on their own stock.

The other effect of the repurchases is to reduce the dividends the company has to pay. When they use the cash, theoretically they get back appreciation in their own stock plus savings from the dividend. So the idea is that the total return is going to exceed the opportunity cost of keeping the cash.

When companies have huge amounts of cash, as in the case with Microsoft, there can be a lot of pressure to increase the dividend. In 2005, when Microsoft paid a special $3.00 dividend, you could see the spike in personal income in economic charts. So a stock repurchase would decrease the cash and alleviate the pressure on management to pay large dividends.

Q:  Would you explain the idea of being indifferent to market capitalization? Why do you believe that this is a better way to manage money?

A: If you look at the total market cap of the S&P 1500, which is made up the three indexes that cover the capitalization ranges - the S&P 500, the S&P 400, and the S&P 600 – you’ll see that the S&P 500 makes up 88% of the total market cap, the midcap index makes up 8%, and the small-cap makes up only 4%. To me it doesn’t make sense to go benchmarking in the small-cap arena as the benchmark represents only 4% of the entire market.

I’m sure that somewhere along the line Microsoft, despite being a size leader in recent years, presents growth opportunities. If you exclude it because you think it is very large, and therefore mature, you bail out of a company that continues to do a great job. So I’d rather invest regardless of the company size, just concentrating on finding approximately 30 good companies for a portfolio.

Q:  What are your portfolio construction principles?

A: Currently there are 37 stocks in the Ave Maria Growth Fund; and, they are approximately equally weighted. Different from other managers, we don’t feel that we’re so clairvoyant to place different weights on the stocks that we believe are attractive.

We keep track of the portfolio in terms of the diversification among the 11 economic S&P sectors but we’re not trying to mirror the index. For example, although many healthcare companies are excluded from the fund as offenders, we still have 16.1% of the fund in healthcare, which compares to 12.9% in the S&P 500. The Utilities, which represent about 3.5% of the S&P, are not included in the fund because they tend to have low return on equity and high dividend payouts, which doesn’t fit with our investment approach.

The general idea is to construct a portfolio that is more profitable which might also trade at slight premium to the S&P 500 price/earnings multiple, other things being equal. The weighted return on equity for the portfolio is 24.5% compared to 17.9% for the S&P 500, in the way we measure it. The earnings multiple for the fund on average is 16.8 times the 2007 earnings against 15.7 for the S&P 500.

Q:  With 37 holdings and a long-term approach, one would expect that you also have a low turnover. How do you deal with the short-term market volatility?

A: Turnover tends to be low, currently at about 30%, but it could be lower on an ongoing basis. We differ from other funds because we make longer-term capital investments. We have the securities ranked and most of the money is in the top range of the ranking. The securities just don’t race to the bottom and cause us to sell and create a high-level turnover.

The strategy of higher return on equity and lower price-to-earning ratios is going along with the market, which goes up about 77% of the time, according to longterm studies. In the period 1941 through 2005 there’s only been fifteen years when the market was down. There’ll be overweight companies in the portfolio or companies that go up a lot relative to the rest, so we’ll cut them back. But that doesn’t happen overnight and we’re not the kind of managers that buy something and sell it if goes up five to ten percentage points.

Q:  How would you describe your sell discipline?

A: We sell securities if they appreciate so much that they move from appearing attractive in the top quartile to being unattractive in the fourth quartile. Another aspect is when a security that performs well, becomes substantially overweighted in a portfolio. We cut it back because we want to avoid the possible negative impact of a security that’s done great and then reports a disappointing quarter, drops in price, and has a disproportionately large impact. A third reason for selling would be if a company has a continuum of problems, regardless what the numbers say. An example would be Merck with the Vioxx problem but that doesn’t apply to the fund because Merck is an offender.

Q:  What is your view on risk at the fund and the security level?

A: I look at risk as the historical standard deviation of the average return for the stocks in the portfolio, measured against the standard deviation of the average stock in the S&P 500. To me the definition of risk is the volatility of the return line. It’s clear that the S&P 500 is more risky than the 30-year Treasuries and you can see that by observation because of the volatility of the return line.

For our portfolio, the standard deviation of the average stock is 24.8%, which means that the average stock could go up or down by 24.8% in any year and two-thirds of the time be statistically insignificant. The standard deviation of the average stock in the S&P 500 is 34.9%, which means that the fund has notably lower standard deviation with better return on equity and with a price-to-earnings multiple that is slightly more expensive than the S&P 500. It may not be a perfect process but it has been a good journey and so far has been rewarding.