Q:  Can you describe some stocks that you picked?

A: Lamar, the billboard company, is a mature business with some economic sensitivity depending on advertising trends, but there is an interesting secular change going on there - the move to digital billboards. It’s very early, in the sense that they’re targeting a couple hundred by year-end out of 80,000 billboards, but the dynamism in terms of revenue per billboard is impressive - in the range of 5 to 9 times what they previously could get.

One of our small cap companies is Daktronics, which makes digital sports displays and billboards. In the most recent quarter, in round terms, they produced revenues of about $90 million compared to $80 million expected. This suggests that the demand for digital billboards is rising faster than expected.

Although Lamar had expected to install about 1,000 digital billboards by 2010, they commented recently that the limiting factors were municipal regulations and sustaining high revenues per billboard. And they indicated that regulatory pushback had lessened over the last year, making them more optimistic about the rate at which they could install digital billboards.

That sounds encouraging for both Daktronics and Lamar and shows the benefit of using information from multiple sources to cross check business conditions.

Q:  What kind of risk do you perceive, measure and control?

A: We tend to think of risk control from a fairly traditional diversification perspective. We’re not big on some of the quantitative models other people use, and the reason is that when you’re building a portfolio of companies that have positive surprise in their fundamentals, often the backward looking statistical characteristics of how they have traded becomes much less relevant. This is because the improving business fundamentals are attracting new investors, causing the stock to respond to key fundamental developments rather than just floating along with the market or trading with its group.

We do diversify. If you look at it from a sector perspective, the biggest weighting will be 25%, or in the case of the very few largest sectors which, in growth, tends to be technology, consumer discretionary, and healthcare, we give ourselves leeway to be ten percentage points higher than the index weighting. So if an index weight were 20% in a sector, we could be 30%.

Q:  Do you follow any benchmarks, like a mid-cap index?

A: Most of our clients benchmark us to the Russell Mid-Cap Growth Index. We have a few that will look at us against a style neutral index over the course of a cycle, but that’s over a many-year period.

For the mid cap fund, we look at stocks in the range of $1 billion to $10 billion market cap for initial purchases, but we also often happen to think of there being about 800 stocks in our investment universe.

Q:  Can you give us a few examples in which your research process helped you identify stocks and some examples of stock picks that did not work?

A: In May of 2003 we bought Harman International, a company known for high-end car radios. When we looked at it at that point in time, the real key element of our decision to buy was that people perceived the company to be selling a commodity product, meaning car radios, to a tough group of buyers, meaning car companies. The reality was that car companies were beginning to move from buying discrete components like radios, telephones, DVD players and GPS to integrated networks. Harman was beginning to win significant amounts of business and instead of selling $300 radios they were selling $1,500 - $2,000 systems - higher price point, higher revenues, and better profit margin potential. The car companies did this because they were able to cut out meaningful amounts of weight and cut out meaningful amounts of cost compared to buying all the individual components. We sold the stock about a year ago after its having been a very good performer. What changed in terms of the expectations versus reality was instead of winning almost every competition and remaining the dominant player, they started to lose little bits of competitive share.

A recent disappointment was Janus, which we purchased last fall. It worked well for a while and we did make some money. When we bought it, asset flows were improving because their key investment product was growing rapidly and they had improved performance on some of their mutual funds, allowing outflows to begin to dissipate. They were also talking about significant cost cuts that suggested the ability of leverage the new business. That should have worked out, except they reversed themselves on the cost cutting and started spending a lot more money than they had planned to spend. We decided to exit the stock as management’s spending plans turned a positive into a negative and seemed likely to limit the company’s ability to generate upside.