It’s still probably not something a growth manager would buy these days because the growth metrics are slower than they once were, but we think that Microsoft in the next couple of years can easily record double-digit earnings growth.

Q:  Do you specifically look for turnaround situations or is the price drop the catalyst of your interest?

A: It’s both. Sometimes there isn’t such a dramatic fall in the stock price. A stock may start to screen well on various valuation metrics after it has fallen for some time and people are slowly giving up on the name, so we’ll start analyzing it. There are also situations like Microsoft, in which we have been looking at a stock when an event-driven opportunity comes up quickly and gives us a great entry point. I can’t say that every stock that we have included in the portfolio has had a dramatic fall in stock price. But we monitor these holdings over time through a quantitative tool, and our interest is driven by the companies that start to screen attractively.

Q:  How do you approach portfolio construction?

A: The portfolio is constructed entirely through a bottom-up process. We don’t make any top-down plays based on economic forecasts or industry outlooks. It’s the exact opposite because you may often find value where the economic environment has been poor.

Right now we have about 58 names in the portfolio, so it’s not overly concentrated but it doesn’t include too many names either. We want the stocks to be able to have an impact if we are correct in our analysis. We haven’t moved out of that 55 to 60-name range for the past couple of years. In certain environments, when there may be a broad array of mis-priced sectors out there, we may include a larger number of names. For example, in years 2001 and 2002, the market was very concentrated on the technology and internet sectors, but we felt that there were a lot of other value opportunities available. So when the bubble burst, we had about 78 names in the portfolio.

Q:  What’s the average turnover of the fund? T

A: Our turnover depends on the market environment but it’s somewhere in the 25% to 40% range. In some cases, we may be holding a name that has had a good run and may even present additional upside, but it is not as attractive as a stock we have identified as having strong upside potential. In these cases, we will cut back or sell the holding completely to allow us to add the new company to the portfolio. This process allows us to use the profits from holdings we are not worried about because they don’t have as much upside potential as the company we want to add. That approach keeps the portfolio fresh with a very manageable amount of turnover.

Q:  What kind of risk do you monitor and how do you mitigate them?

A: We run a diversified portfolio consistent with the idea of looking for value everywhere. One of the ways we manage risk is to be invested in every sector. But as an active manager, we’ll be overweight and underweight relative to the Russell 1000 Value Index. We are benchmark-aware, but we do place bets against that benchmark and try to outperform it.

The analysis of the downside risk when entering a position also helps to minimize risks. If you have a lot of confidence that the holding has a good return profile for the amount of risk, it is manageable if the negative scenario continues.

From a risk standpoint, we know the marginal contribution of risk of each of our holdings. We know where our tracking error is versus the benchmark, but we are not managing to a specific number. We are more interested in getting good ideas for our portfolio.