Q:  What is the investment philosophy of your fund?

A: Flexibility and risk control are our hallmarks for growth investing. Like most investors, we want to generate good returns over long periods of time, but we don’t undertake excess risk. We believe that if we are in the top 40% in our peer group on an annual basis, then on a ten-year basis, we’ll be in the top decile.

Flexibility means that we don’t look at every stock in the same way and we don't have one rigid process for all stocks. We review a spectrum of stocks, including aggressive growth and reasonably priced stocks and use different analysis and valuation depending on what is most appropriate for the company. We believe that if you have only one way of looking at stocks, you will be less diversified than you want.

Risk control is embedded in our portfolio construction process. We have a portfolio structure that is competitive in any kind of a market environment. We believe that our core competency is picking stocks, both in terms of the upside and in controlling risk, so we try to hedge away the decisions in terms of cap size and type of stocks.

We are a research-driven shop and we believe that, at the end of the day, fundamentals are reflected in the stock price. In the growth world, there is a huge sentiment component that drives stocks in the near term, but we try to capitalize on it by taking advantage of our fundamental knowledge. That’s why we focus more on certainty and less on timing.

Q:  How do you find growth stocks?

A: Our process is very straightforward. Probably about 70% of our stocks come from screens. We screen on growth rates and margins, return on equity, return on invested capital. Although valuation is central to our approach, we use that as a screening metric only occasionally as it can be misleading. For example, high P/E stocks may have temporarily depressed earnings and be actually pretty cheap, so we prefer to get to valuation in more of a manual process. We use the screening, our intuition and experience to narrow the list down. The other 30% of ideas come from prior research, company visits, and industry sources. We are pretty agnostic about where the idea comes from as long as it is a good one.

Q:  Would you highlight your research process?

A: We usually start with the SEC findings and build a detailed historical financial model. We use information from the footnotes and any other filings like the proxies, not just the Ks and the Qs. The historic model gives us a detailed understanding of the business model and of the company's reaction to past events. When we talk to the management, most of our questions revolve around why certain decisions were made and how certain events impacted the financials.

We also build a forward-looking model with the understanding that earnings forecasts are likely to be wrong, but they help us understand the sensitivity, the expectations, and how reasonable they are. A great part of investing is built on expectations and we try to have a clear picture of the aggregate of other investors who are aware of the stock.

We spend a lot of time on the earnings quality and accounting decisions analysis and on evaluating what can go wrong with the company. We actually decompose the Wall Street story because there isn't any structural interest in the investing community to talk negatively about companies and you have to tear a company down to understand what the risks are.

Once we are comfortable with the risks and the business model, we build the opposite case. To profitably invest in a company and make excess return, we need to have a more positive view than the usually optimistic Wall Street scenario. If we can’t understand how the future is going to be brighter, then we don’t have an investment opportunity.

We make decisions on a collaborative basis, not on a vertical reporting basis. With only 36 stocks in the portfolio, we are able to know our investments really well, not only me but also the people that I work most closely with. In the mutual fund industry, usually the analysts are experts in a specific industry, but the portfolio manager knows nothing about the details. In our fund, we want to use our collective heads, to eliminate analyst bias and just understand the company. This approach also enables us to substitute for each another if urgent decisions need to be made.

Since we run a concentrated portfolio of 36 stocks, we know we are going to have high standard deviation of returns. But we believe that knowing the companies better, helps to react better in a volatile world and is a way of controlling risk. The volatility in the market can be your friend as you can capitalize on the fundamental knowledge.

Q:  What is your approach to portfolio construction?

A: We have three baskets of stocks, each of them representing about one-third of the portfolio. The baskets help control risk and ensure that we have stocks that are participating in whatever market we are in. The first basket is comprised of growth industry leaders, which are larger companies that are leaders in their market or niche or are taking share. These stocks tend to be bigger, less volatile and do very well when the market is going up and not too bad when the market is going down.

The second basket represents consistent growth companies, which tend to have predictable or recurrent revenue models. They usually are well-diversified companies that are not exposed to any one product or customer at any time. These stocks tend to do well when the market is going up and relatively better when the market is going down. These are the quality names that people want when they are worried about the market, but still want to be invested on the growth side.

The companies in the third basket are emerging growth companies. Typically, they are growing faster and have some type of advantage, a technology, management or execution advantage. These companies experience high growth rates, they are bit riskier and we tend to buy relatively small percentage of them.

We are also a multi-cap fund. We have between 25% to 40% of the stocks in each capitalization bracket. We don’t know which market-cap range is going to perform better or worse over the next 3 months, 2 year, or 10 years, and that is why we are invested in each category.

The idea of the basket portfolio structure is to benefit from a specific market trend and to control the risk at the same time. For example, in 2000 and 2001 the market was a very tough place to be and the consistent growth basket helped us generate outperformance relative to the peers and the benchmarks.