Q: Morningstar rates your fund with a “5 Star” overall rating and an “Above Average” return rating. Since the bear market set foot on Wall Street in 2000’s first quarter, your fund has continually outperformed its category. What’s your secret?

A: It is one word: Discipline.

Q: What stock index do you compare your fund with?

A: There are lots of ways to think about that. In terms of a stock index, as people traditionally think of stock indices like the Dow Jones or the Nasdaq, we think the best benchmark for us to compare ourselves to is the S&P 600 and it’s also the one we use as the starting point for our process. In terms of measuring our performance, we think a group of established small cap managers without any heavy style bias would also make a good benchmark. We want to know how we are doing relative to other experienced small company managers who lack a heavy style bias. So scratch out the deep value investors and scratch out the folks with the heavy growth style bias and the 67% of those established small cap managers in the middle there, that’s the group we compare ourselves against.

Q: What is your investment philosophy?

A: It’s hard to separate our philosophy from our goals in my mind. But our goal, our purpose, is to make money and to manage risk. We want to create wealth for our shareholders and clients, but we also want to manage the risk. That is the foundation or the underlying premise. What we believe is that the Forbes 400 represents compelling evidence that a superior business model and a superior company can create immense wealth and it can also go a long way to manage something I call business risk. And if we buy those companies at a discount to fair value, we manage something called valuation risk. Another way to phrase it would be - quality companies at a reasonable price.

Q: Each day over 6,800 different stocks trade on the NYSE, AMEX and Nasdaq. How do you filter out the stocks to meet your standards?

A: When we’re building our portfolio we try to develop a winning strategy for each of the key sectors. For example, let’s take technology as a key sector. We want to build a strategy for technology that allows our technology sector to outperform the S&P 600 technology sector. We have a sector weight rule that says that we are going to own no less than 75% of the S&P 600 key sector weight and no more than 125%, in other words we’re never going to be more plus or minus 25% of the S&P 600’s key sectors. We know we have to own something in each one of those key sectors, now we’ve got to decide how do we start this winning sector strategy? We start by looking at something we call our sector factors. For each of these major sectors: consumer, technology, financial, industrial and healthcare, we have a sector factor for each one. These sector factors do two things: we think that they dramatically winnow the universe and they also reduce business risk and improve the odds of success.

The companies that survive these key sector factors then move on to the next phase of our process where we ask ourselves which of these companies have many of the attributes that make them a superior business. A few attributes that are the most important to us, but are not the only ones we consider, are a high return on capital, high quality earnings, which really means strong operating cash flow and good balance sheets. In other words, they are not getting the high returns because of a lot of leverage, but they’re getting high returns because it’s a great business.

After we go through these attributes, we then do a lot of valuation work. That’s where we sharpen the pencil and spend most of our time.

Q: What’s the average number of securities in your portfolio?

A: Right now, we have 86, but we restrict ourselves to a range of 75 to 100.

Q: What about any foreign stocks?

A: We’ve occasionally had one where it’s been more of a technicality than an actual foreign company. We’ve never invested in a company whose primary markets are foreign. We are presently invested in a company, which is incorporated in the Virgin Islands, so technically it is a foreign company, but for all intents and purposes it’s domestic.

Q: What’s the average shelf life of your investments?

A: One to three years. That’s our investment horizon.

Q: What’s the market capitalization of the stocks you invest in?

A: We’ve been running around $1 billion weighted average market capitalization, but the sweet spot for us is really that $500 million to $1.5 billion range. Right now we’re averaging around $1 billion and we’ve been hovering around there for a long time.

Q: Do you do your own research?

A: Yes, most of that is proprietary, but we do leverage the sell-side of the Street to help us understand the sector factor issues and even provide some insight into management. The attributes are pretty self-explanatory. In valuation, we again leverage the Street research for some modest help. We like to attend Street sponsored conferences too. At these conferences and through each stage of our process we also expose ourselves to other names outside the S&P 600. There is definitely a mosaic at work here, and all of us on the team have a lot of buy-side and sell-side contacts that contribute.

Q: How many are on your team?