Q:  How would you describe the investment philosophy of your fund?

A: We have two funds, the Micro Cap Opportunities Fund and the Emerging Opportunities Fund. Micro Cap has been closed to new investors, but since we had many clients still interested in that space, we launched the Emerging Opportunities Fund. This fund invests even in smaller companies than the Micro Cap fund. You could almost call it a “nano-cap” fund, but we came up with the name Emerging Opportunities.

Q:  What is the average market value of the two funds?

A: Our firm was established to invest in small and micro-cap companies and we de- fine that space as the smallest of the smallcap stocks. According to the prospectus, we invest in companies with market cap below $250 million.

We rank all the companies and separate the part below the bottom eighth decile. Today that number is about $500 million or less and that’s where we start with our Micro Cap fund. There is some overlap between the two funds but, in general, we’re trying to maintain the distinction of the eighth to ninth decile for the Micro-Cap Fund and the ninth to the tenth decile for the Emerging Fund.

That means that the average market-cap of the Micro Cap fund is about $250 million, while of the Emerging Fund it’s usually around $100 million or less. Today our average market cap is about $80 million.

Q:  Why do you invest in such companies? What value do you find in the smallest part of the market?

A: We truly believe that by investing in the smallest companies you get the biggest return for your money, which is obvious if you read Ibbotson long-term data. We take a very long-term approach to our investments, looking over the next three to five years. Hopefully, we’d hold the investment that long in the portfolio.

Most ranking services define us as a blend strategy, although we lean toward the value side. We’re certainly looking for some deep value type of investments, but we’re also investing in growth stocks. We have a GARP approach in that space and we want to make sure that we are buying at a discount.

Q:  How many companies generally fall into your universe? Are there specific sectors that pop out consistently in that market- cap range?

A: Not really. Maybe business service companies end up in the space often but, generally, it is à pretty broad-based universe. If you include the pink sheets, the overall universe consists of about 10,000 companies, but we don’t invest in pink sheets. I’ll look at a pink sheet company only if I know that the comapy’s stock is going to be moving over to the bulletin board or the regular NASDAQ. Excluding those companies, our universe probably consists of 4,000 to 5,000 companies and our analysts are searching all the various aspects to find new investments for each of our funds.

Q: How many names do you have in the portfolio on average at any given time?

A: We have more than 100 names in both funds at all times. We maintain a very broadly diversified approach and that’s part of the risk control. Our general rule is that the positions start between 0.5% and 1.5% of the portfolio. If we get beyond 3% in any individual name, we start selling even if we still think there is more upside potential. We just don’t want to get too tied up in stock-specific risks.

The portfolios are built with a bottomup approach. We don’t pay attention to sector or industry breakdowns although we regularly look at our portfolio to see if we’re getting a little heavy in a certain one. We don’t have specific rules for industries or sectors but if we see a concentration of 20% or 30% in one industry, this is a red flag to examine our weight there.

Q: What is the benchmark that you track or are aware of?

A: For the Micro Cap fund, which we launched in 1988, we use the Russell 2000 index because it’s been around the longest. But since we launched the Emerging Fund about two years ago, several micro-cap indexes have been created. We compare our numbers against two of those indexes, the Russell Microcap index and the Morgan Stanley Micro-cap index. Those indexes may not be the perfect ones for our funds, but we think that they are the closest ones and, obviously, we need a benchmark to measure our performance.

Q: How do you handle the liquidity issue and the lack of coverage of these stocks? Do you view these as a problem or as an opportunity?

A: Research is a very important part of the process in the micro-cap space. It is true that liquidity isn’t great and there aren’t a lot of research firms following these companies, so we do a fair amount of research internally. But there are also regional brokerage firms and paid-for research firms that help us out with ideas.

Our research process starts with screening the various databases. We also go through the earnings releases, the newswires, the SEC filings, etc., to see if any ideas pop up. We network with about two dozen regional brokerage firms and paidfor research firms to find ideas. That’s how we sometimes get our better ideas because many micro-cap names don’t usually appear in the traditional databases. Even if they end up there, the data may not be reliable, so we like to do our own research and dig through the numbers.

Once we get an idea, the company is put through a proprietary nine-step process. We’ve combined a quantitative model with fundamental analysis. The nine-factor model is based on items that you can get from the balance sheet, income statement, and the cash flow statement. If a company scores well on six out of the nine factors, then we’ll do more research on this company, which includes asking the management some questions, doing channel checks, as well as assessing the valuation and the growth rate.