Q:  In your experience, have many companies gone through that cycle in the last few years?

A: Yes. It all depends on the business model, how sustainable it is versus more cyclical type of businesses and ones that do an acquisition here and there to get themselves bigger.

An example I can think of is WebSense. We owned it when they came public in 2000. A lot of their revenues are done or pre-sold and they collect the cash over several years or they have long-term contracts. They sell 1 to 3-year licenses out to people and they recognize revenue each month it comes in. We don’t own the stock now, but we owned it when it was a micro-cap company when it came public and it gradually grew to becoming a $1.1 billion market cap company.

Every quarter I have names that get over $1 billion and I have to let them go but our small-cap fund can continue to hold them. We’re always looking for new ideas and continually have names in the pipeline that either have a lower weighting or we’re waiting for the right price or for a certain catalyst to get it into the portfolio.

Q:  How do you start with the idea creation that becomes a stock in your portfolio?

A: Occasionally, we do come up with investment themes. We had one in 2004 when we noticed a lot of stocks doing well in industries that, on the surface, were not related. We did more work on this and it all came back to homeland security and defense. Many names popped out from there and we went back and talked to the companies. A lot of the money we hoped to see after 9/11 started freeing up and a lot of people were experiencing accelerated growth rates in their revenue. Once we find a theme like that, we may put 15% to 20% of the portfolio if we can find good companies. We did that back in ’04 and it helped our performance.

We’re now seeing increases in the nonresidential construction theme, for example. We’ve had a lot more industrial names that have helped out the portfolio this year. One industrial name that we own is Flow International. They make water jet cutting tools that are used a lot in carbon composites that are being used by the new jets made by Airbus and Boeing. This company has come out with this water-jet cutting tool that is being widely used by the Aerospace industry, and it’s making it into new markets. For example, SanDisk has ordered some of their products -- it’s a $600,000 product at better than average margins.

We’ve got a lot of companies like that, including Badger Meter or heating ventilation companies like Comfort Systems.

Q:  Would you explain your portfolio construction? How many names do you have, what is the turnover, and what benchmark do you use?

A: We usually carry about 50 to 55 names. We put a lot of focus on our top 20 names, which tend to be about 45% to 50% of the portfolio. Turnover is typically around 200% in dollar terms. The name turnover is much lower, closer maybe to 100%. We benchmark ourselves to the Russell 2000 Growth index. Occasionally we’ll look at the smaller end of the Russell 2000 Growth and that’s more representative of our market cap range.