Q: What are the core beliefs behind your way of money management?

A: The main aspect of our investment philosophy is that we try to find great stewards of capital, which means managers of mutual funds or managers of publicly traded companies that deploy capital prudently and earn high rates of return.

We are value investors, although we may gravitate towards growth at reasonable prices. We invest in a combination of mutual funds and individual stocks. It’s a relatively concentrated, but globally allocated, portfolio. The international exposure may come directly, through ADRs, or through mutual funds.

Q: Could you describe your definition of 'value'?

A: For us 'value' means stocks that trade at a meaningful discount to their intrinsic value. We calculate intrinsic value as the price a reasonable and informed buyer would pay to purchase the whole company. We have five different intrinsic value calculations and my favorite one is current price to o much on relative valuation analysis because many investors can go wrong by applying relative valuation comparisons in a vacuum. Relative valuation would not be useful during a stock market bubble, for example, if you were comparing technology companies that were all overvalued.

Another important part of our strategy is investing in companies that offer growth at a reasonable price. Some of our holdings may trade at higher multiples and cannot be defined as traditional value. However, if we know a company well and if we are reasonably certain that its assets may double, or at least gain appreciably, over the next year, we may invest in it. If such a company trades at 18 times next year’s free-cashflow, we would define it as value, although commonly it would be classified as growth at a reasonable price.

Q: Which regions and industry sectors does your universe include?

A: The mandate of the fund is extremely flexible because we don't want to limit our investment potential. In essence, the Rogé Partners Fund is almost like a hedge fund. We can short stocks, use leverage and buy derivative securities. Nor are we constrained by market cap categories. For example, we have invested in an Australian moving company with market capitalization of about $32 million, as well as in Berkshire Hathaway, which is one of the largest U.S. firms. But our average market capitalization is likely to be less than that of the S&P 500 because we find more valuation anomalies in smaller-cap companies.

Globally, we can invest in any region that we feel comfortable with, even in the emerging markets. We invest in more countries than the typical international mutual fund because we’re not limited by our mandate, and about 25% of the mutual fund is invested oversees. But we have to be comfortable with the accounting and the political environment in those regions prior to investing there.

Q: What are the key elements of your research process?

A: On the mutual fund side, the process represents a combination of qualitative and quantitative research. About 65% to 70% of the fund is allocated in mutual funds, so the fund manager research is very important, and that's where our company has the most expertise.

We start by screening databases like Morningstar or Alexander Steele’s Mutual Fund Expert, looking for a strong track record of risk-adjusted returns. When the funds are new, we look at the historic track records of the managers. If the managers run separately managed accounts, or a hedge fund, we review the audited track record of their separately managed accounts.

The important factors in selecting the funds include portfolio construction and turnover. We prefer concentrated versus diversified mutual funds and low turnover over high turnover. We believe in long-term investment strategies because they are tax efficient. We want to invest with money managers that buy businesses for the long-run, not trade stocks based on next quarter’s earnings.

On the qualitative side, we talk to management and submit a questionnaire with about 50 essay questions that very much resemble your questions. In that way we collect information that’s not available in the prospectus. We then follow-up with management to clear up any remaining questions. That process enables us to weed out a lot of managers who don’t conform with our criteria, and it’s worked pretty well.

But the crucial factor is whether we believe the managers deploy capital in a prudent fashion and are able to earn a return above their benchmark. Often these funds are very flexible and don’t have a set benchmark, and we compare their returns to the S&P 500. Not being pegged to a style box is a positive sign for us because we prefer broader mandates. Overall, we try to find the brightest mutual fund managers and give them as much flexibility as possible.

Q: What is your strategy regarding the individual stock selection?

A: On the individual stock side, we generally adhere to the same strategy of finding great stewards of capital. Our research is bottom up and we use traditional value metrics, such as price to earnings, price to book, price to cash flow, enterprise value to free cash flow – which is my favorite – and enterprise value to EBITDA. We also look at profitability ratios such as operating margins, return on invested capital, return on assets, return on equity, debt to equity, and interest coverage ratios.

A key issue in the selection process is making sure that the companies are well capitalized. They should have plenty of cash on the balance sheet to weather inevitable downturns in the industry or the economy. Large reserves of cash and low debt represent potential for companies to increase future earnings. The companies could implement share buybacks to increase the earnings per share; they could issue a dividend, or increase the existing dividend, to return cash to the shareholders; or they could leverage the company and invest in other growing markets. There’s a lot of flexibility when you deal with a company that’s well capitalized.

In our selection process, we take a straight business perspective. We evaluate the strengths of the brand and its momentum, the current market share and its anticipated growth. We examine the marketing plan, the business plan, and the overall strategy. We evaluate management’s ability to improve brand loyalty, to increase the margins, and to allocate capital efficiently.

The capital allocation is among the most important issues. Similarly to a mutual fund manager, the company manager every day has to make capital allocation decisions. We look at the five-year history of the managers because there is a difference between saying something and actually doing it. So we review whether they bought a dot-com back in 2001, or bought back shares when their stock was at a 52-week low.