Q:  What happens once it becomes part of your holdings?

A: We normally invest 50 basis points in the name initially to make sure it gets on board. Then we buy and sell stocks on a daily basis. Typically, we’d build a stock with a strong acceleration story rather quickly. We use a technical pricing indicator tool and combine it with fundamental indicators. We will make the position larger as fundamentals or relative strength improves.

Q:  What are the key elements of your portfolio construction process?

A: Generally, the portfolio is constructed of 90 to 100 names and we’re always trying to concentrate it further. Right now, our top 30 names represent about 70% of the portfolio, up from about 62% back in February.

We go through the names on an individual basis and determine which ones are worthy of being in the top 10 and the top 20. They will be our best ideas and typically have more durable acceleration trends, themes, strong prospects for positive estimate revisions and potential for further multiple expansion. We’ve also got names on the “farm” team that may actually represent less than 50 basis points, but we hope they will become larger positions as our conviction level grows.

We also keep a close focus on which stocks have negative technical rankings to help determine whether or not they should remain in the portfolio. A deterioration in business trends or a persistent downtrend in relative strength will constitute a sale.

Q:  Are you focused on a certain market cap range?

A: We’re focused on mid-cap stocks. Right now we are about 60% mid-cap, 20% small-cap, and 20% large-cap, but we have our own way of looking at the world. We define our mid-cap sweet spot in between $1 billion and $10 billion in market cap.

We take into account how small caps are performing relative to large-caps. For example, large caps have recently been dramatically outperforming small caps and because of the relative strength portion, we may tilt a little more toward larger names.

Q:  If you had similar acceleration codes and technical ranking for a large and a small-cap stock, which one would you choose?

A: That’s where the sector, industry and relative strength come into play. All things being equal between a trucking stock and a healthcare stock, for example, we’ll buy the healthcare stock if the healthcare industry is working better.

Q:  What is the turnover of the fund?

A: It’s a little over 230% over the last twelve months. We’re playing in a universe with high levels of growth and we’re looking for sustainable acceleration, which doesn’t maintain itself over a long period of time. I remember one particular situation where Analog Devices accelerated for nine consecutive quarters, but that’s an exception rather then the rule.

Q:  Since the acceleration and the pricing strength can expire rather quickly, for how long do you typically wait to make sure the trend is there? Can you afford to wait for several quarters?

A: I agree that there’s a certain point where you’re too far down the road. We have to move quickly when we get the first initial indication of acceleration. We typically don’t really see anything happening after three quarters, as the acceleration phase generally does not last that long.

Q:  You said that you don’t follow any benchmark but which benchmark are you compared against? What is your view on diversification?

A: We have used the Russell Mid-cap Growth primarily because historically, it looks most like our portfolio. But we don’t construct the portfolio according to that index.

More importantly, we use the internally constructed benchmark that I had mentioned earlier, which takes into account names that have acceleration and positive relative strength characteristics. If we can’t find acceleration and the market has no interest in a certain sector, then we may not own many stocks in that area. We may stray from the public benchmark we’re monitoring to invest in acceleration.

I believe that in a lot of ways, diversification can hurt you rather then help you. We’re always trying to go with our best names and concentrate the portfolio because that’s the opportunity for outperforming. While the market’s going south and some may want to diversify and spread the risk out a little bit, we’re taking the opposite approach and still trying to concentrate.