Q: What are ICON’s core beliefs when managing money?

A: We are first and foremost value investors. We use a quantitative, nonemotional, modified Benjamin Graham formula to value 153 different stocks in the Telecom and Utilities sector. Then we compare this computed value to the price the stock is actually trading at in the market. We believe that events and emotions can create situations where stocks trade below their fair value and we look to capitalize on these opportunities.

Another element of our philosophy is the belief that the markets move in themes, with different industries and sectors leading the market at different times. We therefore rotate into industries that we believe have value and show signs of leading the market. For example, following the burst of the tech bubble, the integrated telecommunications services industr y fell more than the overall market and never caught up in the bull market that followed. This led to a situation in 2005 where the integrated telecommunications services industry as a whole traded at a deep discount to our estimation of fair value. When this industry showed signs of leadership in 2005, we rotated heavily into it.

Q: Do you focus only on the U.S. telecom and utility sectors, or you have a global approach?

A: In this fund, we invest only in securities that trade in the U.S. and are denominated in U.S. dollars. However most of the major international telecom and utility companies have ADRs that trade in U.S. dollars on American exchanges and this allows us to gain global exposure.

Q: How do you handle the valuations in the emerging markets?

A: We use the same systematic approach to value for every company in our database. This approach first looks at a company’s past earnings to create a realistic earnings base. We then look at both analysts’ expectations of future growth and the actual growth rates the company has achieved in the past. We create our own internal growth rate from a blend of these numbers and use this estimate to grow out the earnings base. This number which approximates a company’s future cash flows is then discounted for risk by using the company’s beta multiplied by the 20-30 year Moody’s AAA bond yield.

Although the approach is the same for all stocks, emerging market stocks will differ from their developed market counterparts in two ways. First, in our experience, emerging market companies typically display doubledigit growth rates compared to 5- 10% growth rates for companies in developed economies. While this will increase the valuations of emerging market stocks, their betas are also typically much higher and this will serve to appropriately discount the extra risk associated with these names.

Q: What’s your definition of the utility sector? Which companies are included in your fund’s investable universe?

A: We consider five different industries within the Utilities sector: electric utilities, water utilities, multi-utilities, gas utilities, and independent power producers and energy traders.

Q: Could you give us more details on your investment strategy? How do you select the stocks?

A: We first use the same systematic approach that I described to value all 153 stocks in the Telecom and Utilities sector. We then divide our calculation of value by the stock’s actual price to create a value-to-price ratio. For example if we calculated a stock’s value to be $60, while it is trading at $40 in the market, we would say that it has a value-to-price ratio of 1.50. This basically tells us that for every dollar we invest in this name we believe we are getting $1.50 in value.

The next step is looking for industry themes within the sector. We do this by grouping the 153 different stocks into their respective industries like fixed line communications or electric utilities. The value-to-price ratio for each industry is then calculated using a simple average of all the names in that industry. Finally, we look for industries that we think both have value and are showing signs of leadership and rotate our assets into stocks with value and leadership within those industries.

Q: Could you explain how you find ideas and select the securities that you actually buy and sell?

A: Once we have made all of our value- to-price calculations for each stock and each industry, we begin to take a top down approach. First, we must be sure that the Telecom and Utilities sector as a whole has value or a valueto- price ratio above one. Just as emotions can create undervalued stocks, industries, and sectors, they can also create situations where entire sectors or markets are overpriced.

If we find value in the Telecom and Utilities sector, we then drill down to the industry level and look for those industries that are showing the best combination of value and leadership. For instance, in 2005 the integrated telecommunications services industry showed the best combination of value and strength. We then dig deeper into that industry and look for the stocks that also show the best combination of value and leadership in that space and invest in those names.

Q: Could you give us some specific examples of ideas that developed into stock holdings to illustrate your process?

A: The integrated telecommunications services industry in 2005 that we keep mentioning is really the best example to illustrate our process. This industry had been discounted so deeply by the early part of 2005 we could actually plug in negative growth rates for a number of the large cap companies’ and still see value-toprice ratios around 1.40 or 1.50. If you looked at these companies recent history however they were showing signs of growth and the analysts following these companies were predicting even stronger growth. Our models saw tremendous value throughout the industry, and therefore, we rotated nearly 50% of the fund into the fixed line industry when it began to show leadership.

Q: What are the most important elements of your portfolio construction process?

A: It really comes down again to the belief that markets have themes where certain industries will lead or lag the market. We don’t believe in picking our twenty favorite stocks across the sector, but rather in picking our favorite industries.