Q:  What is your investment philosophy and guiding principles in money management?

A : We established the fund in 1988 with the idea to build a total market advantage fund, which focuses on equity and income investments. Our goal was to find the most efficient exposure to undervalued sectors of the global market.

This is a global fund, designed to incorporate large, medium, and small-cap domestic and international holdings, and its primary prerequisite is that the securities pay out dividends or interest. Those securities include dividend-paying common stocks, convertible securities, long or short-term bonds, other fixed-income securities, and exchange traded funds or ETFs.

I believe that the name ‘Efficient Frontier Capital Income Fund’ depicts quite well the actual goal of the fund. It is an asset allocation fund, but an extremely diversified one. It enters the realm of Efficient Frontier because we have holdings in practically every area of the global market. The Capital Income Fund is one our five funds that focus on different areas of the global market, such as value, growth, multiple index, and income. Together, those funds provide direct access to modern portfolio theory, through a Master Allocation Portfolio.

Q:  Could you explain your understanding of the modern portfolio theory? What are you trying to capture through that strategy?

A : We focus on the complete diversification of the market and on providing a balanced whole portfolio service. That means that we provide diversification in each category of global investing. All five of our funds are globally invested. When we put them together, we have a truly super diversified portfolio, without leaving out any major portion of the marketplace. The only markets that we avoid are the ones that aren’t free, such as the Venezuela market, for example. We believe that our Master Portfolios provide the greatest diversification in the industry, without compromising performance.

More importantly, investors have simple access to this diversified product, and can invest as little as $500 or as much as a couple of million dollars. Our goal is to provide the most efficient portfolio available, and we are excited about the future with this product.

Q:  What characteristics do you look for when selecting the companies?

A : Over the years, we have structured different proprietary search models, designed to capture multiple quantitative results. Currently, we are running about twenty research models that are built to give us quantitative insights into different opportunities worldwide. Some of them are looking for undervalued fundamentals; some of them are looking for undervalued growth; and some focus on mid caps, buybacks, or high return on equity. But it is the combination of the twenty models that you get with our products.

When adding securities to the portfolio, our goal is to pick the areas of the market that seem most attractive. We don’t focus on just one particular quantitative result, but on many quantitative results. We avoid overweighting markets, sectors, or securities. While many money managers like to use overweighting to beat their benchmarks, we have found that this strategy can lead to fatal mistakes in a portfolio.

We focus on the long-term earnings of companies because we want to keep our holdings for years. Our goal is to find good, long-term dividend and interest investments that are able to weather storms through all market cycles. Of course, the turnover may be erratic because the markets are erratic. For example, back in 2001 the fund was aggressively buying areas of the international technology market because the securities were so cheap, and we were able to reap the benefits in 2003 and 2004.

We try to avoid the sectors and the businesses with poor fundamental characteristics and with strong competition. Currently, the auto sector and the homebuilders would be examples of such sectors we are avoiding.

Q:  Within your global approach, how important are the economic, demographic, and currency views?

A : We do an extensive research of the global marketplace for the areas that show good gross domestic products, strong currencies, favorable political environments, liquidity in the marketplace, and low inflation. Of course, each market is dynamically changing, so we have to be able to adjust as the markets and global economies move. Overall, we look to be in the areas where we feel like we have the best long-term possibilities.

Q:  Let’s suggest that Germany, UK, and Brazil fit your basic criteria. How would you decide on your asset allocation?

A : We don’t overweight any market, so if we like all the three markets, we would have positions in all of them. Actually, we do have positions in those three markets. Once we evaluate each of the markets based on their individual merits, we may overweight some of them in our value fund, in our growth fund, or in our capital income fund, depending on where we see the best opportunity in that marketplace. However, the allocation will even out through the five funds, and in the final result, there would be no overweight in any market. The five funds will come together as a complete and balanced portfolio.

The Capital Income Fund has a natural tilt towards more mature markets because they provide greater income than the developing or the emerging markets. We also have more large-cap stocks as individual holdings, such as JP Morgan, Kraft, and Philippine Telephone, which is an emerging company that’s paying dividends. The bottom line is that we make every effort to spread the portfolio amongst small, medium and large domestic and international securities.

Q:  Could you give us some examples of specific holdings that illustrate your idea generation and research process?

A : We start with a global review and day-to-day pricing to make sure that we understand the direction of the markets. Once we locate a market that has positive characteristics, we apply our quantitative programs to evaluate the securities from a bottom-up standpoint. We look for price-to-book ratios, growth ratios, free cash flows, yields, debt, and other technical and fundamental indicators. The market capitalization is also very important to us. We analyze the larger companies first, and then we work down through the markets to the small-cap companies.

Since our primary goal is to find diversified holdings, once we find an individual security like Philippine Telephone, we won’t go back to the Philippines to look for a second holding. Instead, we would move in a completely different direction, maybe to the other side of the globe. That could be Southern Copper Peru, which is a recent addition to the fund that provides exposure to a completely different market and income. The company is a very strong player in its market and we believe that the stock provides many years of productive investment opportunity.