Q: What drives your buy and sell decisions?

A: Decisions to buy securities are based on the expected return for the next twelve months as well as the impact of that holding on the fund’s overall return/risk profile. Decisions to sell are based on changes in the valuation of that security or better return/risk alternatives. Historically, we have preferred securities with low price to earnings multiples.

The stocks at the bottom of our list are the ones that have high volatility and low returns - those are the stocks that we look to sell. The stocks at the top have the high returns and low volatility and would be the ones we would like to buy. A few weeks back, for example, Coca-Cola scored well enough to be noted but not well enough for us to buy. But I still like this company for a lot of reasons. It is a global company and extraordinarily profitable business.

Q: You mentioned that you have quite a bit of exposure to foreign companies. What’s the reason behind it?

A: About three months ago foreign businesses were producing higher returns that were less correlated with domestic returns. Generally, volatility in the foreign markets is higher than it is in the United States because the United States is considered a safe haven. As the foreign stocks are starting to pick up more volatility and become riskier, we are getting less of those coming through the screens. Three months ago probably 80% of the stocks coming through the screens were foreign ADRs and today they are probably less than 30%. Our models are adjusting to the overall volatility and return profile which I look at every day.

Q: What’s your portfolio turnover?

A: The turnover is a function of the overall volatility of the markets and the type of stocks that you are buying. Our turnover in the past has been as high as 300%. This year it is running on an annualized basis near 60%. When we had 300% turnover we were investing in a lot of smaller companies that are quite volatile and they jump around so you get frequent opportunities to buy and sell them.

Q: How many stocks do you typically have in the portfolio and are they all equally weighted?

A: We generally hold somewhere between 120 and 140 stocks but it depends on the nature of the stocks. If they are small stocks, then we want to own more stocks; if they are larger companies, then we can afford to own less.

We don’t try to do sector diversification. The models that we use help us with that so we are not going to end up in a situation where we are 50% or 60% invested in a sector. The weightings are put upon the volatility of the companies and that’s all calculated for me. We put as much effort into mitigating volatility as we do on returns.

The models that we use generate returns on the stocks based on the characteristics that they have. The expected earnings revisions upward or downward have a big impact on our ranking system. We also try to take into account as much as possible and incorporate as much of the latest research as possible into what we do.

Q: How do you control risk?

A: We are always comparing our existing portfolio with a potential stock that we want to buy to see whether it adds or subtracts to the volatility and actually how much it adds or subtracts to the overall return of the portfolio.

Overall, in terms of risk controls, we measure the volatility, we look for ways to spread across as many names as we have and we anticipate what the trends are evolving in the market and take corrective actions.

Q: What are the sectors that you would rather stay away from?

A: One good example would be the coal companies. This is partly because coal companies typically do well when natural gas prices are high because they are a substitute for natural gas. I think when a coal company is really doing well natural gas got up to $18 per MCF and I saw today it was about $5.50 per MCF. So now natural gas is really cheap and then it also has a lot to do with whether a hurricane is going to hit the Gulf Coast and things of that nature. I think the coal companies are pretty toxic at least for the time being.

A lot of the thrifts or banks have made their money on mortgages. There’s not going to be a lot of mortgages going in the next few years. And no one makes money on foreclosures. So that would certainly be another toxic area for us.