Coach migrated its brand to more fashion forward designs. In doing so, they were able to attract a younger and broader customer base, who buys a new bag for each season, in contrast to their traditonal, more conservative customer, who tends to buy handbags for their longevity. We continued to hold this company until about a year ago when a couple of us concluded that Coach had become too fashion forward, so their stuff was indistinguishable from the handbags that abound in the department stores.

Q:  How is your research process organized?

A: We have a group of ten experienced analysts. Our process is disciplined. First, we have to stay on top of the IPO market and follow every IPO’s path from its initial filing with the SEC to the offering and then its aftermarket trading. Every company is assigned a research team with a lead analyst and a reviewer. When the research report is completed, the team presents its conclusion to the entire research department.

Q:  How do you go about portfolio construction?

A: The portfolio tends to have anywhere between 40 and 60 holdings with position sizes ranging from about 1% up to around 5%, with the larger and more liquid companies tending to be at the high end of the holdings, as a smaller less liquid company at the lower end.

We are diversified and very cognizant of not having huge weights in any one sector. We will look at our weighting in a particular sector as broadly defined as financial services, or energy, and if, for example, we have 20% weighting in energy, that is a little high for a diversified portfolio and we ought to cut it back. If you want to add another energy company, then we have to reduce the holding of something else to keep the balance. It is important to note that we are a multicap manager. The portfolio holds stocks of all market caps, with the caveat that the minimum market cap is $50 million. In practice, however, we tend to avoid the microcap companies and focus on stocks with market caps of at least $100 million.

Q:  What is the turnover in the portfolio?

A: The turnover in the portfolio has ranged from 100% to 200%. It’s a high turnover.

Q:  What are your views on risk control?

A: First, if the company is not working out after we buy it, we tend to sell if the near term loss hits 15%. We believe in cutting our losses although we’re not always able to do that. Another thing we could do is short the portfolio up to 33.3%.

The other risk control is that we can go to cash for a short period of time. We have done that, not quite 100%, but we’ve had our cash go up to significantlly. But we try not to be market timers.

Q:  Between 2001 and 2003 there was very little on the calendar. How did you handle the situation?

A: We focused on owning the very best companies of recent IPOs, which is when we took a new look at Coach, we took a look at Genentech. We will then go back in time to the top IPOs. When the IPO market slows down, we know that is a sign of overall market weakness and we tend to get more conservative and try to pick up high quality companies whose valutions may have become more attractive. The first IPOs to emerge after a correction tend to be very cheaply priced, because buyers demand low valuations to assume the risk of stock ownership.