Q:  So then what kinds of stocks do you invest in? Do you look for companies that piggyback on a larger trend or fi nd regional or local champs?

A: We go wherever we fi nd value and so we invest in all the three kinds. One typical example is Kansai paints, a little-known Japanese small-cap company that we own. What makes it attractive is that it is the sole paint supplier for a large cap player like Toyota Motor Company. This company yields good returns to us because it piggybacks on the growth of a global giant.

Representing local Starbucks fl avor is a coffee chain that we own in Japan called Doota’s Coffee, while an example of a regional airline, virgin Blue an Australian airline which operates in a very narrow yet highly competitive Melbourne-Sydney route.

We also own commodity, pure play companies that supply global raw materials, mostly to China so we get some exposure to emerging markets too, indirectly through these stocks.

Q:  How is your research process organized?

A: Our goal is to value companies and identify biases, so a major part of our research process is based on the fact that if we want to exploit other people’s emotions we need to design a research and investing process that controls our own. We follow three methods to achieve this goal.

First, no one in our group is allowed to carry wireless communication devices. This eliminates all external noise like emails from somebody giving latest stock information that may compel us to react - a total waste of time. We do not have any stock price terminal, which again will only result in unnecessary emotions as when our stocks’ prices fl uctuate. Thus the key to our investment process is to stay unemotional and unbiased about the data.

The second is our trading schedule. We wait for the release of real information such as quarterly reports in Europe and the U.S. and semi-annual reports from most Asian markets, before trading. We usually trade around the release date of earnings, so when the market releases real information we can draw the right inferences and conclusions from it. At other times, we continue our research effort.

Thirdly, we do not meet company managements any more as we believe the information they give is very subjective and hence a waste of time. We prefer to look at management’s actions and these are clearly displayed in the fi nancial statements – their returns relative to the industry, their profitability, their investments, stock buyback, debt management etc. Thus the only objective information is found in fi nancial statements.

Q:  How do you structure your portfolio? What is your benchmark and how many stocks are there in the index and the portfolio?

A: The portfolio is built completely from the bottom up perspective. We do not consider macro views such as, which sector, industry or country is likely to outperform. Wherever a company is cheap or mis-priced we buy them.

Our benchmark is the S&p Citigroup Extended Market Index ex US, comprising 4,500 stocks. Our portfolio contains the top 20% of the list of stocks having the most negative biases. Thus at any point of time there are about 400 to 500 names in the portfolio, with the top 100 names accounting for nearly 75%. It is a fairly concentrated portfolio despite 500 names because, that is 1 in 10 names in our benchmark compared to S&p 500 or russell 1000 portfolio, that is the equivalent of owning 50 to 100 stocks. On average, we hold the stocks for about two to three years so our turnover is roughly 30% to 40%.

Q:  What is your buy-sell discipline?

A: Our buy-sell discipline is dictated by how we ultimately rank our stocks. Ranking ensures that the fi rst 20% of our list of stocks we can invest in and have the most negative behavioral biases and are cheap in our estimate. Buying is thus a mechanical process as we just buy the top 20% of our list.

Over time the valuation attractiveness of some of these stocks deteriorate and they start becoming less cheap, to the point where they might become fairly valued or even overvalued. The behavioral rank model starts to deteriorate as the stock goes from being hated to people being neutral about it, to liking it, to loving it and fi nally, becoming irrationally exuberant about it. These stocks then begin migrating to the bottom 20% of the portfolio when they are automatically sold.

Q:  How do you control risk?

A: The worst risk is getting our stock selection wrong. Being international investors, the U.S. dollar fl uctuations affect us because we do not hedge in this portfolio, the risk that one of our bottom-up bets, when aggregated at the portfolio level, will be wrong. Japan is a case in point where we are now overweight from the bottom up. While our benchmark has around 20%, we have nearly 25% of our portfolio in Japan. We have derived the 5% overweight position from the bottom up perspective but that hasn’t helped in the last two to three years. However, we do have risk control and we limit 5% of assets in a country and generally will not go above or below a certain amount in the benchmark.