Q:  Why should investors consider a balanced fund and why should they consider your balanced fund?

A: Not every investor has a lot of money to spread across a wide variety of funds. A balanced fund can take care of both their fixed needs and their equity needs in one investment. Our fund is designed to provide consistent income plus capital appreciation. If you are conservative or older and want to hedge against inflation, an investment in equities plus current income is a good investment.

We try to maintain consistent increasing income. We look for companies that increase their dividend at least every other year. They should have great cash flows, stock repurchases and rising earnings. We are looking for shareholder friendliness in some way.

We also invest in convertible bonds, convertible preferred and high-yield bonds. We buy mostly unsecured, high yield bonds with ratings of BBB or lower. We wouldn’t be earning our keep if we were just buying Treasuries.

About 75% companies pay some dividend nowadays but they don't always increase yearly. We try to look for the companies that continuously increase their dividend – we don’t invest if they don’t – and we have 200-300 companies on that list. More and more companies are starting to pay dividends.

Q:  Would you define yourself as a value investor or as a GARP investor?

A: We use both processes. Most people don't have hundreds of thousands of dollars to spread across different funds.

Q:  How do you implement the philosophy of balancing income and appreciation into an investment process and strategy?

A: We start with a screen of about 10,000 securities. Then we keep refining it until we get it down to some companies that we can do research on. After we research them, if they fit the criteria we are looking for, we invest in them.

We use profitability and value screens. We do a relative value screen of performance within the industry, we use P/E, price per share, operating cash flow, EBITDA, P/E to growth, etc. Then we do vigorous fundamental research to identify the best ideas. We look at both historic and projected earnings and we normalize them to take out all the noise. That process narrows the universe down to a handful of 100 or 200 stocks.

Then we talk to the company, check who they compete against, check to see if there are any lawsuits outstanding, look at the balance sheet, capital expenditures, what they are going to need for the future and if they generate enough cash to take care of that, their debt rating, etc.

Q:  Do you rely mainly on bottom-up research and valuation?

A: Yes, but if we have a top-down idea, we look at it. Flexibility is very important in research. Our primary purpose is to discover companies with rising dividends, cash flows and earnings, but we are also looking for companies that are improving their market share, their R&D, their technology or their leadership in the industry.

As far as the selection of convertible and high-yield bonds is concerned, it must be a public company or we wouldn't buy it. We go through it and tear it apart just like every company we invest in. We are interested more in their cash flow than in their earnings, because we need to know that they can pay us back. It is strictly a debt structure perspective.

Q:  Do the fund analysts specialize along sector lines?

A: We have 6 analysts for the bond research and 18 to 24 analysts for the equity research. They are generalists, pretty broad based. But in certain areas, you definitely need people who understand the industry. Such areas are drugs, technology, and energy. In the drug field, we have an analyst who was a medical doctor for 9 years and also has an MBA.

There is no consistency across sectors. In the 80s, the food stocks were really hot. In the 70s, it was energy. In the 90s, it was technology, the dot-com boom, and the medical stocks. In 2000 it is a new group, the financials. Now energy is back. Trends keep changing because investors end up chasing a group and it gets overpriced. It is the greater fool theory. For example, today everyone is buying real estate in the US. At dinner parties people discuss how many homes they bought, how they are speculating and how much money they are making. The dot com has been replaced by the dot home, and no one expects to lose. I guess that happens with most sectors of the market when they are hot. Companies come and go but there are always new companies and there will always be rotation of trends.

Q:  Would you explain your portfolio construction process? What are your views in terms of sector weighting or benchmarks?

A: We try not to follow weightings and benchmarks in the Balanced Fund. If I wanted to be an index fund, I could become an index fund. The investors who want mediocre index returns don't need me. The market has to measure us against the other balanced funds, not against an index. We try to be the best among the balanced funds and to maintain our special edge in what we do.

We have up to 60 stocks and usually have 30 or 40 bonds. So we run either 60% in stocks and 40% in bonds or vice versa. We invest entirely in domestic stocks and bonds.