Q: The Fund is managed by a team, can you describe team members?

A: The Munder Small-Cap Value Fund adheres to a team-based management approach. However, each of the three portfolio managers -- Robert E. Crosby, CFA; Julie R. Hollinshead, CFA; and John P. Richardson, CFA -- are recognized for their investment expertise in certain sectors, the result of their diverse backgrounds, and accordingly take the lead in analyzing potential investment opportunities in companies that hail from their particular areas of specialization. Crosby, for example, has energy sector and REIT fund experience, Hollinshead has covered the consumer staples and retail sectors, and Richardson has a strong finance sector background.

Q: What is your small-cap investing philosophy?

A: Investing in the small-cap arena requires a readiness and commitment to conduct extensive research, adhere to a disciplined investment approach, and not least of all, the 'stomach' to withstand the sector's inherent volatility. The small-cap segment of the market can be rather inefficient, and only well-prepared investors will have the confidence required to invest during such times. Our investment approach is based on in-depth company evaluations on, among other criteria, the return on invested capital and consistent profitability. This patient and disciplined approach can deliver return to the investor while also mitigating some of the volatility.

Q: How do you put this investment philosophy in practice?

A: The first step is to identify strong management teams at companies that are selling at reasonable prices. One of the best measures of whether the company is well-managed is the return on invested capital. We do not look for turnarounds, nor deep value, and are not asset players. We do not place much emphasis on the Street's consensus estimates and prefer to follow our own proprietary research and investment goals, rather than try to guess where the market is heading and what other people may be doing with their capital or in this space.

Our initial investment ideas come from proprietary screening, but we’ll rarely buy a stock without having met the management. We adhere to a bottom-up stock-picking approach, which means we look at a company’s filings to understand its historical performance, its fundamentals, and its management philosophy, all of which ultimately helps us discern how the company got to where it is today. Perhaps as a result of such familiarity, we are comfortable holding a good stock through rough patches. If some external factor should drive the stock down, our knowledge of the company and its leadership will frequently help keep such stock movements in perspective. Indeed, while others are selling, we may very well be buying.

Munder Capital has considerable risk controls in place to ensure we do not venture from the fund's promised investment style, criteria and objectives. The Munder Small-Cap Value Fund typically holds approximately 100 names, which are held, on average, for three years. While the average market cap is $900 million, we will look at companies as small as $125 million but no larger than $1.6 billion. More specifically, we benchmark to the Russell 2000 Value index, have a maximum tracking error of 7%, and keep individual stock weights down to less than 2.5%. It is also worth noting that we also have sector constraints based on the index weights. Clearly, diversification is key to managing risk, particularly in a volatile sector like small-caps.

Q: What is your buy discipline?

A: For initial purchases, we look at companies under a market cap of $1.6 billion, as that is the ceiling placed on small-cap for the Russell 2000 Value index we benchmark against. In terms of the bottom of the range, that is determined mostly on liquidity concerns. In terms of valuation, we focus on trailing enterprise value to earnings before taxes, depreciation and amortization (EBTDA) on a four-quarter basis. We are skeptical of any company with frequent write-offs.

Q: What is your sell discipline?

A: Regardless of how well a stock has performed, we will look to reduce our holdings if it appreciated to where it is approaching 2.5% of the fund. As a value manager, we like to trim the stock, and sell the position only if the fundamentals have changed. We draw a distinction between external and internal misses. For example, we will sell the stock if we lose confidence in internal execution, such as missed targets, where there's an apparent lack of controls, or if we lose confidence in management.

There are times when we sell the stock on valuation concerns -- where we cannot justify it or we have more appealing alternatives. We will generally hold a stock for three years, evaluating it on a quarterly basis.

Q: One requires intensive research to succeed in the small-cap market. How do you build this advantage?

A: As indicated earlier, we start with proprietary screening to identify profitable companies we may want to include in the portfolio. Once we have a preliminary measure, we will then drill down deeper for a more comprehensive understanding of the companies in question. Our research includes conversations with management, as well as in-house and external research. If there is no analyst following a company we are interested in, we simply compile the data ourselves, following a bottom-up approach. We place a lot of emphasis on our own proprietary research and do not mind if there is no Wall Street coverage on a stock.

Q: What is your screening process?

A: As mentioned earlier, fundamental screening is very important, but it is only one part of the stock selection process, particularly if you adhere to a bottom-up approach like we do.

To simplify a complex process, we look at a number of financial measures in our screening. We typically look for companies that are two- to three-times more profitable than average, but are trading at lower-than-average valuation. The fundamental question that we always have to answer, of course, is 'Why is this profitable company trading at a discount?' We strive to find the answer through our qualitative analytical process. Frequently, the answer lies somewhere in perceived earnings, cyclicality, interest rate risk or market conditions.

We look at P/E and return on invested capital [ROIC], but our primary measure of value is enterprise value to EBTDA. We look for above-average profitability and historical consistency across quarterly earnings. As a result, we tend to find more opportunities in the consumer discretionary, finance, selected industrials and healthcare arenas. It is more challenging to find utilities, materials, and technology companies that fall within our parameters, though we always find some.

Q: Do you find meeting management helpful?