Q: What is the investment philosophy of the fund?

A: The fund is composed of allocations to three separately managed funds. It contains an 84% allocation to our mid-large cap developed market international strategy, a 10% allocation to our emerging markets strategy and a 6% allocation to the international small cap strategy. We strongly believe that superior stock selection combined with a disciplined portfolio and risk management strategy is the key to consistent performance.

Q: What are the key elements of the superior stock selection?

A: Superior stock selection is driven by three key characteristics - positive change in the company’s business, rising investor expectations and attractive relative valuation.

First, positive change is what drives stock prices so we’re looking for an acceleration of growth or profitability. For example, a company we currently own in the fund, Commerzbank, is a leading German bank that as recently as 2003 was losing money. However, now the bank is likely to earn a return on equity of close to 15% next year. This dramatic turnaround in the business was the result of management focusing the bank and shedding unprofitable ventures. Management focused the bank’s lending on the core German middle market and retail banking business and reduced the international lending and trading activities. They also accelerated non-performing loan writeoffs. These actions resulted in a dramatic positive change and return to sustained profits. In contrast, the leading UK banks, Lloyds-TSB and HBOS, for example - have continued to grow their earnings as well. However, rather than seeing a significant positive change, they’ve been growing EPS in the mid-single digit to 10% range because they’ve already been well-managed institutions, and the banking environment in the UK has been more benign than in Germany. The companies we invest in will not always be of the highest-quality, however, they will always be seeing positive change.

Second, we look for rising investor expectations or confirmation that this positive change is happening. This can be in the form of stock price-relative strength or positive EPS revisions from the analyst community. Finally, we look for attractive relative valuation. We invest in companies that are trading at a reasonable price on expected cash flow and earnings, preferably at a discount to peer groups.

Q: How would you describe your investment process?

A: Our investment process begins with two key resources - our analyst team and what we call ‘the global research platform,’ which allows us to cover a broad array of securities. We have twenty portfolio managers and analysts that have direct input on investments that go into the diversified international fund. There’s a dedicated emerging markets team, a dedicated international small cap team, and a dedicated mid and large-cap team.

The analysts use the global research platform as a key tool to screen the universe they are responsible for. It focuses them on the most attractive 20% of their universe. Through our proprietary models we have captured the positive change, rising investor expectations, and attractive relative valuation, which is the core of our investment philosophy. The analysts' job is to decide which opportunities are the best. Our analysts talk to company management teams, competitor companies and sell-side analysts to conduct the due diligence. In many cases our team has met with these companies in the past. We meet more than 1,000 companies every year. Our analysts then summarize our research findings in a written document that they pitch to the PMs and the idea is either approved or not approved.

Q: What kind of benchmark do you follow? How many stocks or companies do you monitor at a time?

A: We use the Citigroup BMI World ex-US for the core 84% of the fund. The benchmark contains 5,200 companies, we then screen out the companies that don’t have the necessary market liquidity. That leaves us with just over 2,000 companies. We then focus on the top 20% of these to research in-depth. These global companies are located in 23 to 25 countries around the world.

Q: Do you exclude South America and other emerging markets such as Russia and Asia?

A: We exclude emerging markets and leave those countries to our dedicated team responsible for 10% of the fund. Our developed markets teams focus on the following: Europe, Canada, Australia and countries in Asia such as Singapore, Hong Kong, South Korea and Japan. Europe represents over half of the universe.

Q: How do you deal with the issues related to accounting and currencies?

A: Over the last several years we’ve seen a convergence of accounting standards across the world as European companies have adopted IFRS (International Financial Reporting Standards). We focus on cash flows as part of our valuation work. We have incorporated cash flow valuation models in our quantitative tools that allow us to compare companies across countries.

In terms of currency, our analysts understand the business and they take into account how currency impacts the forecast for sales and profit within a company. We do not hedge the portfolio's currency exposures, as we believe investors in international funds are willing to invest in the currency of those countries as well.

Q: How many stocks do you have in the portfolio?

A: We have around 700 securities in the portfolio. Roughly 400 of those are in the small-cap, about 150 are in the emerging markets, and about 170 are considered core investments in the developed markets. The investment allocation weights in some cases are quite low. However, it’s been demonstrated that performance does not suffer due to the number of securities.

Q: How does that translate into portfolio turnover for you?

A: Our portfolio turnover is around 100%. It turns into an average holding period of about a year. When we look at companies and do the research, we’re looking for that positive change to be sustainable and last for six months to a year.