Q:  Would you describe the investment philosophy behind managing the ICON Long/Short Fund?

A: ICON’s investment philosophy is based on a quantitative, non-emotional model. We believe that events and emotions can create situations where stocks trade below their fair value, and we look to capitalize on these opportunities. Using a modified Benjamin Graham equation, we value each of the stocks in our universe to identify the stocks and industries that are significantly overvalued or undervalued.

A key part of our long/short philosophy is that we are opportunistic, and we go where we see a gap between the intrinsic and the market value of a company. We don’t try to fit into a style box. Overall, we let our quantitative methodology dictate where we go. We focus on the numbers and we ignore the emotions because we believe that investors’ emotions create opportunities for us.

Q:  How does that philosophy translate into an investment strategy and process?

A: Our universe consists of approximately 2,000 U.S. companies and we value them on a quarterly basis using a modified value approach. We use the historic earnings to form a propriety earnings base that is representative of the company’s past. Then we grow that base using a long-term growth rate that we feel is sustainable and conservative. We do look at the analysts’ estimates for the short- and long-term growth, but we adjust those numbers with a conservative bias because we believe that analysts tend to be overly optimistic more often than they are pessimistic.

We then discount these future cash flows back to the present with a factor that accounts for the opportunity cost and risk relative to the Moody’s AAA bond yield opportunity. The discounted cash flow of future returns gives us the present value of the company.

We divide that present value by the market price of the stock. The difference between the value and the price represents a ratio that reflects our estimation of how undervalued (or overvalued) a company is. We call it the “value-to-price” ratio. Overall, we look for companies that trade at a value/ price ratio above 1.00. That means that for every dollar invested, we believe we would get more than one dollar in value.

ICON next breaks down the universe of approximately 2,000 companies into nine different sectors, and we further break those sectors down into 147 different industries. We look for the industries with high value-to-price ratios. In the final selection, we also follow an indicator of how the stock has performed over the last six months.

That means that our process begins from the bottom up as we value each company based on its own merits. Then we take a top-down look at the sectors and industries to determine their value and relative strength.

Since value analysis may lead us to buy stocks and industries before they are ready to move, we also employ a relative strength calculation. By comparing company, industry and sector performance to the broad market, we attempt to identify underpriced issues that are demonstrating leadership and therefore are favorably positioned to outperform the market.

Q:  How would you describe the portfolio construction process?

A: The portfolio construction process on the long side involves overweighting sectors, industries, and companies with the most value. The average number of holdings in the fund varies from approximately 70 to as many as 120.

Currently, as of August 31, 2007, in terms of sectors, we believe that the leaders are Energy and Industrials. Healthcare is also starting to show signs of leadership, so we would overweight those three sectors.

Then we drill down to the industry level to find the best industries within those sectors. Within Energy, for example, we follow seven different industries, and we see the most value right now (as of August 31, 2007) in oil & gas equipment services. On average, we calculate this industry as having a 1.38 value/price ratio, which means that for every $1 you invest in that industry, we estimate you get about $1.38 in value. Oil & gas equipment services has been leading the market over the last six months, which we interpret as a clear signal that investors recognize its value.

The next step is exploring the company level and looking for the best two or three companies within that industry.

So we use a combination of a bottomup and a top-down approach that is strictly quantitative, objective, and nonemotional. It is based on mathematics and finance. Our quantitative system measures what we believe is the quality of a company. It looks at the company’s ability to maintain and grow its profits, to control liquidity risks, financial risks, and business risk.

The end result is ICON ranks each of the companies on a scale from 1 to 5. A 1 means we believe the company is of the highest quality, and a 5 means we believe the company has the least quality, relatively speaking. We generally look for companies with rankings of one through three because we believe those companies have the best chance for stock price appreciation to intrinsic value, not of value coming back down to price.

We apply the same methodology to the short side, but with a twist. We look for the best of the best on the long side, and on the short side we look for the worst of the worst. That is, we’ll look for companies we believe have the least chance for stock price appreciation.

Q:  What are the key quantitative metrics that you would most often use to calculate the quality of a company?