We bought Goodrich in the aftermath of the September 11, 2001, tragedy when stocks of all aircraft and components manufacturers, were really beaten down. Goodrich, a market leader became dramatically under valued and was already part of our qualified universe because we understood their business and we bought it at what we felt was an extreme discount to its fair market value and held the company ever since. In any case, the general perception is that the aerospace industry will be going through a large product replacement cycle in the coming decade with the introduction of new products and projects.

Q: How is your portfolio constructed?

A: Ours is a focused portfolio of just 20 stocks that are the most undervalued securities in our qualified universe with each equally weighted to 5% of total portfolio. Nothing new is added into the portfolio until something is sold. When a new stock is added our goal is to get to 5% as soon as we can without affecting the share price.

We follow a simple rebalancing strategy while maintaining the portfolio of 20 stocks. If a stock declines to 2.5% of total portfolio value we buy it back up to 5%. If a stock increases to 10% of total portfolio value we trim it back to 5%. We don’t want to have more than 10% invested in a company.

Q: What is your buy and sell discipline?

A: We hold our focused 20 stocks in the portfolio until one of two things happens. One, our quantitative metrics tell us that a company we hold has become overvalued. That’s a signal to us to sell the stock immediately. The other reason for a sell decision is when the continuous monitoring of our holdings reveals that a particular stock no longer holds a position of sustainable competitive advantage, which is our primary investment criterion.

In either case of selling out, the stock is replaced with the one company in our qualified universe that happens to be most undervalued on the day the portfolio vacancy occurs. We value each security daily so we know which is the most undervalued in our qualified universe on any given day.

Q: Against what benchmarks do you compare your fund to?

A: We think the Russell 1000 or the S&P 500 are great benchmarks for what we do because they address the market caps that we focus on and the potential breadth of the kind of companies in which we like to invest. However, we do not make portfolio construction moves to make us look anything like the index intentionally. We think the Russell 1000 is a fair benchmark because we can invest in any company that has $3 billion or more in market cap to meet the liquidity requirements of a concentrated portfolio like ours. Moreover, most companies that are market leaders are usually large cap and since more than 70% of our universe is large cap our average holding is almost always a large cap company.

We also don’t tie ourselves to growth or value style of investing and don’t really care if companies are in the value or growth categories. We only focus on whether they are great companies with sustainable competitive advantage, and try buying them when they’re undervalued and selling them when they’re overvalued. Again, we do not try to put ourselves in the core box either because one cannot effectively add value by sticking to one style box. We believe investing in great companies at the individual level and being strict about valuation is how you add value.

Q: What is your view on risk? How do you manage or mitigate risk?

A: Obviously a focused strategy is going to be a little more volatile than other types so we think that by keeping the weightings equal and continually rebalancing the portfolio will help us to manage risk and not become too overly weighted in any one stock.

We however, do not try to do anything about systematic risk as we’re always 100% long equities in the portfolio. Furthermore, by our own definition, our high quality universe consists of companies that are well managed, with strong balance sheets and have sustainable competitive advantage in their industries and we feel that within a context of managing equity portfolios this is a great way to reduce the risk.