Carnival Cruise Line is a name that’s been in the fund for some time. The cruise industry historically had been adding 10% to 15% annual capacity in terms of rooms or berths, and has cut back to 5% to 8% capacity growth. We know that more people are taking cruises. People are getting older and it is a fun thing to do. It takes three years to put a ship on line so the industry growth looks interesting. Therefore, you’ve got an increasing penetration, whether it is driven by demographics or not, combined with an industry that is now unable to add the same amount of capacity as before. Carnival acquired Princess Cruises, increasing its circle of competence, to target more consumer segments. With the Princess acquisition complete, Carnival is working on becoming more efficient. Given this scenario, we believe they will be able to generate higher pre-tax ROICs going forward. Carnival’s stock price has fallen back a bit this year due to concerns over the consumer slowdown, but we still see a sizable opportunity here.

We add value with our ability to evaluate if a situation makes sense going forward. Our team completes fundamental research, talking to the companies, going through the financials, putting the numbers through different models to see if their vision and strategy makes sense. We try to identify upside and downside price targets thinking from a probabilistic standpoint. We make sure we truly understand the positive and negative side of the story and try to figure out the likelihood of these events happening.

Q:  How is your research organization structured?

A: We have a team of eight investment professionals, including myself. Five of us focus on sectors in the large cap universe and three on the mid-cap universe. Therefore, we have eight professionals evaluating businesses all day long.

We employ experienced, talented professionals who have a passion for investment analysis and their sector. We have a consumer analyst with 19 years of experience in the area. Occasionally we are willing to train talented people too. Our financial analyst was instrumental in finding First Marblehead, a student lender with a unique database with historical perspective on student loan underwriting, when the name was completely under followed.

Ninety percent of our research effort is internal and ten percent comes from the Street. We spend a lot of time looking at 10-Ks and 10-Qs and talking to companies. We use Wall Street mainly to fill in the gaps or to understand the street’s bull or bear case.

Q:  How do you approach constructing the portfolio of 20 to 30 names? What’s the turnover of the fund?

A: We usually try to have at least 25 names in the fund, and we do not have a target turnover. The Street is so incredibly near-term focused that our advantage is being able to stay above that noise and think and invest over the longer term. This makes you ask different questions, not about the catalyst to the next quarter’s earnings report, but about the picture in five years. This way of thinking permeates everything that we do.

Initial positions in the portfolio range from 3% to 5%. We have a maximum position size of 10%. When it gets closer to 8%, we typically tend to trim it back for risk control purposes.

Q:  Despite the return of the major averages to pre-2001 levels, large caps like Citigroup or Home Depot have not delivered during the last four years. Do you worry that you may have to deal with investors’ lack of enthusiasm because sometimes you may not be able to hold something for five years?

A: Yes, growth investing has been very challenging. We try to communicate clearly with investors about what they can expect investing in each strategy. Our goal is to out perform our Russell 1000 Growth index, the benchmark, over the market cycle. If momentum strategies are working, we’ll certainly lag in those markets. However, we believe it is better to explain to investors how we think, what we do, where we’ll perform well, and where we may not perform as well.