Q: Are there any industries that are sheltered from globalization and remain firmly in the hands of the Western world?

A: Yes, there are themes, such as the middle class generation in the Pacific Rim or in Eurasia. People want to go to Rome, Paris, and get sense of the old Europe. I've been looking at a lot of infrastructure places, airports, providers, and hotels.

There will always be a financial institution in America, a bank in Germany, a pharmaceutical company, a leisure company, an airline, an infrastructure utility. There may be one strong company and five weak ones. The five weak ones are very interesting from an investment perspective, because they become the freaks of the industry. In some cases they act irrationally, shut down, or evolve into something completely different. This is where the disequilibria theme picks up and we have had some success in these stocks.

Q: Could you describe the organization your research process?

A: The process involves coming up with anchor ideas and quantifying them, because an idea is interesting only if it can be quantified. For supply-chain dominance, we look at increasing market share, margins or product superiority. Certain accounting and product details can be used for screening a vast number of universes. Disequilibria is the opposite, but it comes down to the ability of the management to make that important step. The virtual companies, such as Porsche or Monsanto, have a product, which enjoys high intellectual property rights, manifested in patents or in a brand name with unique appeal. These companies have low asset bases and high average employee salaries.

We screen for these specific metrics through thousands of names and come up with a short list that goes into another short list as it is run through our analysts. Our analysts are experts in validating the investment thesis once a rigorous screening has taken place. When we have something, we are on the phone and on the plane to talk to the management firsthand before we pull the trigger. We don’t do maintenance research, but instead in-depth research on a firm that suggests there is an opportunity to make money.

Last year, for example, we had the sense that European second-tier banks were going through a phase of desperation. Our screens showed many buy signals. So I went to Italy, Germany, Austria, and Netherlands and met CEOs and CFOs of European banks. After that trip we had a very concise idea of what was possible, so we started buying Capitalia, Commerzbank, the banks that have very little downside from a valuation perspective. Some of them have almost doubled sine then.

Q: What triggers selling a stock?

A: There are certain investment theses that have shelf life of many years, while themes on the disequilibria front require quick actions. There are two ways of mis-pricing. One is at the static level, when a company is cheaper versus its intrinsic value. With such investments you have to be opportunistic.
Once it becomes everyone's favorite investment idea, you have to move on. The other type is when the company has future promises that allow you to participate in the upside for years.

I like both types of investments and I think you need both in a portfolio. It is probably more difficult to find the disequilibria, but you can get fast materialization of the upside. Selling a stock, just like buying it, is a function of portfolio construction, which at our firm is a hard science.

Q: What kind of risk do you perceive and how do you manage it? Do you hedge the currency risk?

A: For me risk management is being a better diagnostician of your portfolio than anyone else and understanding exactly what you do. It is more important to be comfortable with the type risk than the level of the risk. We know which issuers are the largest contributors to risk on an hourly basis. We quantify the value at risk, which is an absolute return measure of risk. We know the exposure to currencies and have to feel comfortable with them. When portfolio market moves have been extreme we call extraordinary risk management sessions with select team members.