Furthermore, if we only have 10 consumer non-durable names, they will be slightly over weighted relative to their liquidity, so we move them from 5% of the portfolio to 10% or 15%. At the same time if we have 50 technology names in the index, and they are 50% of the portfolio, we have to trim them down to 30%, because the probability of not outperforming the S&P increases dramatically in such a case.

Our turnover averages 100% which is a sore point for most investors. This year has been a volatile one so it’s high at 160% but we’ve outperformed the index by 500 basis points.

Q:  How do you go about buying and selling positions in the fund?

A: Ours is a minimum variance portfolio since we buy the best total return stocks in every sector and expect them to be independent of sector volatility. This implies controlling for all correlations, interest rate risk, variability of earnings and sales.

This is because we are interested in geometrically compounding our return. We may have the best 10% stocks however we do not know which one is going to be number 1 and which will be number 50. That’s why we look at the correlations and the downward price volatility. If we’re wrong we have to sell it, if we’re right and we’re going to have to buy it, then that involves transaction costs, and maybe we have to contend with the probability of not beating the S&P 500.

Take GE, for example. From a valuation point of view, in this market, GE is low risk even with their finance unit. GE is a very popular name in terms of growth of foreign sales, changes in its business units from getting rid of the finance and getting rid of the cyclicality to more growth. However, the bottom line is that its price-toearnings is just too high, too expensive for the growth that it will achieve given its current discount rate. In the past its discount rate was below average. Consequently, we consider that it is a more volatile stock in this market, and although we have owned it for more than three years now, we are selling it.

Q:  How do you view the risk and what do you do to manage it?

A: Risk is very important to us both at the company and stock level. The stock has to do with beating the benchmark which represents the overall equity market, because you can buy ETF representing the market at a cheap transaction cost. Generally, we have a quality bias, and this bias permeates our whole philosophy.

Our whole process involves looking at fundamental factors driving the risk; not only debt equity or margins, but relative to its industry. Everyone has a different business model so you have to model things appropriately. We first look at fundamental factors, leverage factors, margins, changes, cash flow and their changes relative to their cycle, relative to their industry to avoid the bankruptcy and then secondly if it flows through to the lower variability of earnings and sales of the companies we own. We will also probably not buy companies with lowest Price-to-earnings or priceto- book companies, because oftentimes companies in this group tend to decline in the long term.

We then finally look at the macro level for each individual firm, we’re also looking at changes in interest rates and macro factors and the overall discount rate of price-to earnings to what is often called the earnings yield minus the government bond rate to see how the company reacts to those macro factors. Our aim is to avoid companies that have a high exposure to macro events.