Q:  What’s the investment philosophy of the fund?

A: I’m always looking for earnings and earnings growth, so we are definitely growth investors. We tend to focus on non-GAAP earnings or free cash flow and we don’t like using discounted cash flow. We try to identify earnings growth in companies before the rest of the market does by buying in the most inefficient part of the market, which is the micro cap arena. Stocks that come into the portfolio are generally $600 million in market cap or under, and we sell them when they get to over $1 billion.

Q:  Is earnings growth the only criterion for finding undiscovered micro-cap companies or are there other factors as well?

A: We certainly look at the growth in revenues and we like to find companies with operating margins that are expanding so earnings grow faster than revenues. It’s not so much what the companies have done historically, but it’s forward-looking in terms of what they can do in the immediate future. If a company has just become earnings positive but the possible future earnings makes the multiple attractive, then we’d be interested. We like companies with acceleration in their earnings growth.

Before we get involved in a stock, we discuss with management what their strategy and expectations for the growth are and what the operating model should eventually look like.

Q:  How many companies are there currently in your universe of between $100 million and $600 million micro cap?

A: We focus on companies in our benchmark, Russell 2000 Growth, but we often look at companies that are even too small for that index. There are a lot of companies to sift your way through to find some pearls. We do have a few that are under $100 million in cap but we make sure we have enough liquidity. We don’t like to hold more than 10 days of trading volume in anything so we can make sure that we can get out if we make a mistake.

Q:  How would you describe your investment process?

A: First, we have five portfolio managers and each of us covers one or two sectors. We’re familiar with the names and the sectors we cover. We also use screens to identify companies that have either a positive move in their earning growth, or have been beating Wall Street estimates for a while, or companies that we think are going to have acceleration in their earnings growth going forward. Then we’ll start doing more fundamental work and we also look at some technicals. If there’s a company that has been doing well in the market relative to its peers, we’ll take a look at that.

Each of the five portfolio managers covers a few different sectors. I cover technology and consumer, but in terms of day-today management of the product, I’m the lead portfolio manager on our micro-cap and our small-cap fund. We also have a mid-cap fund and a growth fund, managed by Michael Allocco.

Q:  Are these five people looking at various sectors only in the micro-cap arena?

A: We all monitor stocks along several different cap ranges. The lead manager on our mid-cap product also covers semiconductors, so he may find a micro cap semi name that he wants to put in the portfolio. Our process is all team-driven. We meet three times a week to talk about the macro economic conditions, or about industry trends as well as about new names.

We look at earnings growth and valuation in several different ways - relative to the market, relative to the company’s peers, and relative to the growth rate. We want to make sure that we get the valuation and the earnings growth potential right. Also, we love companies that have solid, seasoned management teams.

Q:  Can you give us some examples of historic stock picks? What process led you to select those stocks and what happened to them in your portfolio?

A: True Religion was a name we owned. We got involved there in the middle of 2005. They were a premium denim company and had experienced a strong demand for their product. Typically, they sold to boutique stores, but they were starting to get more into department stores as Nordstrom’s and Neiman’s. We loved the earnings potential and the company continued to beat their own internal estimates and the estimates of Wall Street. It had excellent earnings growth and the valuation was very reasonable.

When we bought the company they had 22 million shares at $12, so their market cap was about $245 million. We had price target of $20. They did exactly what they said they were going to do - they got into Neiman’s and Nordstrom’s, came out with new products outside of denim, and the stock continued to do well. We trimmed just under $20, then it got up to $24 and we let our entire position go. Street estimates were very aggressive in terms of growth they would need to see in 2006 against some very tough comparables in 2005 and since it had reached our target price, we sold the stock. Now they are up against some tough comparison from last year in terms of denim sales, so their growth is decelerating. The stock is below where we sold it so it was a good sale.

Another example is Stellent, a content management company. They have software products that used to manage unstructured data especially in environments with multiple sites and ones that have a lot of compliance policies. Sarbanes Oxley is actually a big driver for their business. The industry analysts like Gartner and Forrester have been champions of their products and started recommending it for all their clients so the license growth has been very strong, leading to high-margin revenue. Their revenue growth accelerated and their earnings grew much faster than the revenue. They finished their fiscal 2006 in March with a 7% operating margin and made 35 cents per share. Operating margins should continue to expand to 14% in fiscal 2007 which would equate to about 60 cents in earnings. The long-term operating margin target of 18% to 20% would give the company fully taxed earnings potential of a little more than 70 cents. We started buying this stock last year around $8 and it got as high as $13 earlier this year. Now it’s at about $11.50 but we think it is worth around $14.

The old CEO and founder retired several years ago, and when they brought a new CEO in the company struggled. Then the original founder came back and got the company on the right foot. I think this company would probably be a great takeover candidate. This part of software has been consolidating rapidly and as Oracle and SAP have been buying software to improve their growth, I think this would make a great acquisition candidate.

Q:  Are the managers of these micro-cap companies easier to talk to?

A: Definitely. They don’t get the attention that large-cap companies do. They want their stock to do well because they are typically large holders and they like to see that people are interested in their company. Being excited about your business and aggressively communicating to investor community, often can be a good catalyst as well. Since we have some other largercap products, ultimately we’d love to find companies that we can own as a micro-cap to keep getting bigger, and we’d own them in small-cap and then into our mid-cap funds.