Historically, the average holding time has been around two to three years because our turnover has been between 30% and 50%. However, at the time of buying we do not decide on any sort of holding time.

Q: How do you weigh stocks in the portfolio and what is your buy and sell discipline?

A: Our main aim is to overweight underpriced stocks therefore we need to find a signifi cant price to intrinsic value discrepancy, especially if we are going to take a long position in a stock. If we think the intrinsic value of the company is 100 and it’s trading at 100 we will not buy that stock even if it’s a huge component of the index. Furthermore, to buy a stock, we also need a high level of conviction. Moreover, the thesis built by our analysts for each stock in our portfolio should have specific, objective and measurable signposts that will reveal if the thesis is still intact on the stocks being held at a certain point of time. This is because, of the 50-70 stocks in the portfolio, there may be fi ve or six holdings where the fundamentals have changed, or an error had been made in buying them in the fi rst place, maybe a model error or incorrect assumption. These important signposts thus help us identify a thesis violation, whereby the underlying rationale or reason we originally bought the stock no longer exists. Once the stock is in the portfolio, our analysts also continuously reevaluate these signposts that lead to sell decisions.

Our sell discipline is therefore basically two-fold. One, when as a stock moves towards its fair value we want to reduce that investment and second, when we identify a thesis violation. If over time, a lot of our sell decisions are a result of a thesis violation that means probably our initial assumptions on the stock were wrong, but by having the thesis violation in place we can identify our mistakes.

Q: What is your view on risk and how do you mitigate portfolio risk?

A: We have a pretty sophisticated, proprietary, internal risk management system that we built in 2000. We use that as well as the Barra system. We believe more on managing than controlling risk. This is because our clients pay us to take risks. However, we want to maximize the compensated risk and eliminate uncompensated risk. Hence, whenever we study our portfolio vis-à-vis our risk management system, we want our areas of greatest insights in the portfolio to be our biggest contributors to active risk.

Sometimes that can be from an area that we have avoided because the specifi c analyst has done a good job valuing securities in a space that might be really overpriced. We find that a big source of active risk in any portfolio can be both what we own and what we don’t own, and we want our source of active risk to be basically the areas of greatest mispricing. And at different points of time that can be both underpriced and overpriced areas.

For example, in 2004 and 2005, mike nell, our computer hardware analyst, kept us out of semi conductors, which was a really overpriced area and hence one of the biggest contributors to active risk. Consequently, we were able to underweight an area that really was a big danger spot for the portfolio. Of course, today, there are some good opportunities in that space and so there, it isn’t a permanent underweight.