Q:  How do you mitigate risk in the fund?

A: Risk has never made us change our investment decisions. However, it is important for a better understanding of the portfolio. We have a risk budget where we monitor tracking error and target it between 4% and 6%. We are currently at 4.8%, but historically it has been below 4%.

We hold monthly meetings with the risk team where we go through tracking error for the entire portfolio, into the sector and stock level. We go through macro factor sensitivities. We also evaluate growth and value factors in the fund and analyze them against investment styles in our peer group. To us, risk only influences our investment decisions but does not change them. We reduce risk by buying one stock at a time to ensure nothing would change dramatically. Then we do a monthly portfolio evaluation.

Q:  How do you deal with change relating to sudden and unforeseen events that may make the earnings revisions or estimates irrelevant? For example, Research in Motion was a favorite stock with constantly growing earnings but collapsed in October 2005 due to a patent dispute.

A: Research in Motion has a disadvantage that it is a one-product company and other such companies have a wide range of products. Patent disputes are common in the pharmaceutical sector. The consensus tells whether the market is expecting earnings to deteriorate or improve. We don’t buy a company unless earnings are revised positively. For example, we are not buying housing sector stocks now even though they have declined, but the consensus earnings forecast is that of lower earnings in the sector. We have to get confirmation of recovery before we buy a stock. We are not in the business of predicting turnaround.

In a situation like Research In Motion, we would expect earnings to be lowered and then we would decide on such a stock after it has fallen.

Q:  How do you get new ideas considering you focus only on 40 stocks in your portfolio?

A: Besides the 40 stocks in our portfolio, we have another 50 to 60 stocks on our watch list. We also have good knowledge of stocks we have held in the past but sold. We don’t go out of our way to cover all the top stocks in the index as most managers do. We focus on a fewer number of companies which in our opinion are an investment opportunity, be it long term or short term.

Q:  Could you illustrate with examples some of your investment ideas that you have developed from your watch list?

A: A good example would be Gildan Activewear in Montreal, Canada which we bought a year ago after it passed our screening process. It is capitalized at $3 billion. During our research we had conference calls with management and found that the company had good investment merit. It manufactures T-shirts in Central America. It has a very efficient manufacturing system and sells T-shirts to wholesalers. The company has now diversified into socks, underwear and fleeces. It is a high margin business and the company had positive earnings revisions. The historical annual earnings growth at the company has been near 25%, and we are happy to pay 20 times price to earnings ratio for a company with that kind of growth. The management is very conservative and tends to under-promise and deliver better than expected earnings. It has been a very successful investment for us.

Another company is MEMC—Electronic Materials Inc.—which is our largest holding. It manufactures silicon wafers and polysilicon material common in solar panels and devices. It has also benefited from the run-up in polysilicon prices. It’s a company with very strong earnings and momentum and still offers good investment value, even though it is in a commodity industry.