Q:  What is your investment philosophy?

A: We look for high-quality small to midsized companies trading at significant discounts to what we believe they are worth. The $500 million to $5 billion range is full of under-followed companies, and getting in early allows us to invest in companies with strong long-term prospects for capital appreciation.

Q:  What are the key criteria of your stock selection process?

A: First and foremost is valuation. We screen for companies that are trading at significant discounts compared to the market and compared to their historical multiples on earnings and cash flows. Then we conduct in depth fundamental research on these prospects to determine their investment merits.

There are three investment criteria that stand out in our fundamental research process. The first is the company's potential to accelerate organic revenue growth through new product introductions, pricing, new markets or gaining market share. Then, we look for companies that have strategic initiatives to improve their profit margins. Third, we look for companies with strong cash flow generating abilities and strong balance sheets.

Q:  Small and mid-cap companies are usually not very well covered by analysts. Do you do your own independent research?

A: Our independent research starts off with the company's financial statements. We get a sense of what the trends have been, then we build our own models and assumptions. To figure out the probability of success of a company meeting our investment criteria, we'll also go through a detailed call with the management team. We also conduct industry research to understand the economic environment and headwinds and tailwinds that the company will experience.

Q:  Could you give us a couple of examples to illustrate your process?

A: The fund's historic performance has been driven by stock selection in individual sectors. The fund has done very well in the energy sector and in the industrial sector. These were relatively under followed sectors five years ago with many compelling investment opportunities.

In the energy sector, one of the top performers has been Whiting Petroleum, an oil and gas exploration and production company. It was trading at a significant discount to its peers on its proven reserves. People were looking at what the company had done in the past and what the current reserves were and weren't really thinking about what the potential was. When the Fund purchased the stock, it was at a compelling value, it was a business with a strong management team, and well positioned in their markets. The price of oil reaching $100 a barrel amplified returns.

Another successful energy stock was Denbury Resources. They use carbon dioxide flooding to extract excess oil from mature oil fields. Denbury was trading at a significant discount to its peers and to what we thought the company was worth. They were able to capitalize as the price of oil rose and the value proposition of the work they do increased. Both of these companies weren't widely followed at the time when we got involved with them.

Q:  Are there other industries where you have done particularly well?

A: Another area that the fund has done well in is the aerospace industry. One of the top performers there is Woodward Governor, a company that makes products that manage the delivery and the burning of fuel in aircraft engines or industrial turbines. There was a huge demand for the company's products in both the aerospace and industrial markets. They'd invested a lot in the business, so there was the opportunity to leverage those investments and expand margins as they met the demand.

Q:  How do you go about building your portfolio?

A: We have a roughly 60 stocks in our portfolio. About 80% of the portfolio comprises reliable, cash flow generating companies and 20% of our stocks are in a ‘special situation'. A ‘special situation' might be a turnaround scenario, an asset play or a restructuring due to which the company is trading at a large discount to what we think its intrinsic value is.

We initiate positons at 1.5% of the portfolio. We believe that having a balanced portfolio, with fairly equally weighted positions, produces strong returns and minimizes risk over time. At the time of purchase, we like to see at least 50% upside to our intrinsic value target. We also like to minimize the downside to 10% to 20% at the maximum. Another part of our philosophy is to have a diversified, balanced portfolio of companies across different industries.

Q:  Could you describe your sell discipline?

A: Generally speaking, if we expect a deterioration of fundamentals, we are going to exit the position. If a company hits our valuation target, we are going exit the position and replace it with a better alternative.

Q:  Do you measure against a particular benchmark?