Q:  Can you give an example of a company that didn’t pass your screening?

A: A US-based company called AES is one of the largest power contract generators, and they also operate in the regulated utilities business. We have been watching AES and the company is making significant investments in renewable energy and developing renewable energy power plants.

They have broad exposure to Latin American emerging markets and we find that attractive from a growth and valuation standpoint. In terms of our environmental sustainability criteria, this company still generates the bulk of its electricity through fossil fuel burning and coal power plants, and we would need to see greater environmental commitment and investment from AES before it would pass the criteria for our mutual fund. The company is still investing in coal fire plants which emit a lot of CO2. This company is taking small steps now, and hopefully at some point we’ll be able to qualify them, but right now they do not pass our selection criteria.

Q:  Could you discuss one of your top holdings?

A: The top holding in our fund right now is IBM. IBM first developed an environmental protection policy back in 1971. Since then the company has made tremendous progress on environmental issues. IBM already has high supplier standards in place, and even helped develop the electronic industry code of conduct. IBM also provides detailed metrics on investments, expenditures, savings, and cost avoidance associated with environmental protection. Over the past 7 years, annual savings from environmental efforts have exceeded environmental expenses by an average of two to one. Innovative metrics from IBM include those associated with its take-back and recycling of computers relative to sales of new systems. On a global scale, the company resold, reused or recycled 17 PCs for every hundred new sales. Although these figures are fairly low, the company’s transparency is expected to help drive industry-wide improvement.

Basically, our evaluation focuses on the impact of the company’s products, what investments the company is making, what they are doing in terms of leadership for their industry, and what environmental management systems they have in place for reporting emissions and making improvements.

Q:  Do you believe that the environmental policy in companies helps them to be more profitable?

A: The concept behind Portfolio 21 is that the world economy is being significantly impacted by climate changes. We believe companies that are taking steps now to reduce their risks associated with climate change and diminishing natural resources are going to be able to better survive in the long term, and also be more profitable today because they are able to improve their use of natural resources and other efficiencies. This is the number one financial consideration behind our investment philosophy. That’s why the name of the fund is Portfolio 21, where 21 stands for 21st century.

Q:  How many stocks do you have in the portfolio?

A: We currently hold approximately 88 stocks in the fund. The turnover for our fund is very low. Since inception in 1999, our turnover has been in the single digit percentages, so below 10%.

Q:  What kind of buy and sell discipline do you have?

A: Our trading strategy would be best characterized as ‘buy and hold’, where we look to invest in a company for the long term. If there is a company or sector that is not very attractive at the moment, we can allocate funds elsewhere. Thus we can reduce our exposure to certain companies or sectors by essentially not allocating new funds there, but we want to hold these companies over the long term and indefinitely. We are at the mercy of the market and we want to have significant exposure to the areas that are performing well.

To date, we have been able to adjust our exposure to certain sectors and stocks with the allocation of new money. We trim when positions reach a certain point. Our exposure has been limited, though, because we have been seeing significant cash flows into the fund.

Q:  With such low turnover, you have the opportunity to select the companies you are holding for the long term.

A: Yes, and that’s our strategy. Our process of putting a company through our screening is very stringent. We have two full-time researchers committed to this process and we are now adding a third position. Our research analysts spend a lot of time doing very detailed analysis on the companies. Once our upfront research is completed and assuming the company passes our selection criteria, we look to hold the stock indefinitely, as long as the business model of the company continues to meet our criteria.

Q:  What risks do you monitor and what do you do to mitigate them?

A: Diversification is the best way to manage risk. With a global mutual fund we have exposure to many regions in the world, and we maintain a well-diversified portfolio across the globe and across industry sectors. We also focus on investing in companies that are industry leaders, like IBM – companies that are profitable, that are growing consistently, and that have broad geographic exposure so they are not dependent on one particular economy. We like to see companies that are paying dividends and increasing those dividends at regular intervals.

We also control risk by focusing on the biggest and best companies in the world that are profitable, growing and pay dividends. We have currency risks because we invest in a lot of foreign securities but we don’t hedge against this risk. Over the long term we feel that currencies will adjust to reflect returns across different regions. Trying to make currency bets and plays is something we don’t want to get involved with, but at the same time, we feel that the structural bets are secure in the U.S. - budget deficits and the trade deficits make foreign currencies, particularly European and Asian currencies, more attractive than the U.S. dollar at the moment, and we don’t see that changing soon.

The companies in Portfolio 21 have a risk premium that’s not priced into the stock, and this will ultimately benefit the stock prices of our portfolio over time as investors come to realize that the risks we are addressing need to be examined and considered. We do have a unique approach to identifying and managing risk. We believe that over time it is going to be the single most important issue to consider as it is a global issue, not a local issue.