Q: Could you explain your approach to portfolio construction? Do you follow any benchmark?

A: Our benchmark is the Morgan Stanley World Index and while we’re aware of the benchmark we’re not wedded to it. If we believe in an investment thesis or idea, it makes sense to have a large exposure to it no matter what the benchmark “advises” us we should own. For example, the Emerging Markets are not a part of our benchmark and we’ve had zero exposure there at times, but we’ve also been as high as 19% exposure. Likewise, we had very little in Technology back in 2000 despite it being the largest index sector. In general we allow ourselves sector exposures up to double the benchmark weight (or benchmark plus 10% for smaller sectors) and we allow a maximum of 25% in Emerging Markets. You do need some guidelines, but we’re not afraid to stray from the benchmark when we have conviction.

The number of holdings in the fund varies. On average I would say we have held between 275 and 325 names, though a higher emerging markets weight would push the number up (since it uses a topdown approach and we often buy “baskets” of names in that case) as would any “thematic” investment. There is no fixed target, as that would be an artificial constraint and we like to avoid artificial restrictions.

Q: What are the key elements of your sell discipline?

A: They probably aren’t very different from the sell discipline of most money managers. Reasons for selling a stock may include it reaching the target level, a change in business fundamentals, a change in strategy or any other change in the original investment rationale. For example, if we bought it because we liked the collection of businesses and then it spins off a major division, that’s a reason to re-assess the holding.

One area, however, where we do differ a bit from others is in how we “listen” to the market. If a stock is underperforming its sector we will automatically revisit the investment. It does not mean we will automatically sell, simply that we must spend some time looking at the situation.

Q: What kind of risks do you perceive at a global level? How do you measure and mitigate them?

A: We have a risk analytics group that provides us with many measures of risk exposure such as our size, valuation, growth or geographic bias relative to the benchmark. They also provide us with tracking error measurements (likely deviation from the benchmark given our current exposures), though we don’t seek out to contain tracking error – it’s more a residual of our fundamental work.

We have all the analytics to make us aware of the risks we have taken on, but we don’t manage the portfolio to them. They are there to ensure that we haven’t taken on unintended exposures and to help analyze performance post-fact. At the end of the day, it comes back to whether we own the best companies in their sectors and whether we are comfortable with our overall emerging markets exposure.

Q: Do you hedge against currency fluctuations?

A: We tend not to be active hedgers and we don’t separately manage the currency. But if we have a very low US dollar exposure because of our US equity holdings, for example, we may choose to hedge back towards a more neutral benchmark for risk control purposes. We may not want to take a bet on a currency though we can be very willing to take a bet on the company. There was an instance last year when we did hedge some of the Eastern European currencies for a short period of time because we were expecting pressure following a French and Dutch vote on the EU Constitution. But that was a very unusual situation.