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

A: We are a growth fund and we're bottom-up stock pickers. We invest in international small-caps and that excludes US companies. By prospectus, we define small-caps as companies with maximum market capitalization of $5 billion, however, we tend to focus in the $1 - $2 billion range. Our investment strategy is to focus on the small companies with annual EPS growth rate of 15% per year.

Q: Do you base your decisions on historical or projected earnings?

A: We’re always looking forward as we're investing in the future. I’d leave history to the books. The important thing is that this growth is annual. Too many research reports talk about compounded annual growth rates but three- or five-year numbers don't mean much to me because a company can be flat for two years and then perform in the last year. If that doesn’t happen, you’ve just wasted three years.

So we want to see a near-term 15% earnings growth rate per year but we're also valuation sensitive. If the market has lower earnings expectations, on the surface it may appear that we’d pay a lot for the stock initially. However, what invariably happens, particularly in the sectors that we've been heavily exposed to in the past two years, is that the expected E in the P/E equation moves up and shrinks that P/E ratio. So we pay a lot early but the market will catch up, and ideally, will drive up the stock price. The market usually begins to buy the stock after we’ve held it and in any investment process, there is definitely a first mover advantage in identifying those stocks.

Q: What type of companies do you usually invest in?

A: The businesses of many of those companies can be broadly divided into two camps. First, the most beneficial for US investors is the investment in a local business. If the business is within the boundaries of Japan, for example, the customers pay in yen, so there is no currency risk if the sole focus is the Japanese domestic economy. It has no relation to Germany’s unemployment rate or to France’s GDP rate. This is an opportunity to invest in another country’s own economic growth and that's the first key for differentiation.

The second area of interest lies in the fact that the US government and its people consume a lot and we pay a lot. If we can’t pay now, we'll go into debt for it. Nonetheless, very little is made here. And if it’s all made abroad, why not invest in the companies that are taking your money. The easiest example is the oil companies. If you’re paying $3 a gallon at the pump, we'll follow that hose at the gas station and it will lead you to Canada, Norway, the North Sea. So we invest in the companies that are taking our money and expect we'll get some of it back in stock price appreciation or a dividend to offset that per gallon charge.

Q: Are there other reasons for considering international investing? I guess you would like to benefit from the local economic cycles that most people in the US are not aware of.

A: Yes, there are some. We take many things for granted and we think that the way things are here must be the way they are all over the world and that's far from the truth. Overseas you still have regulatory changes accommodating some industries or industries that don’t exist here, at least not on a large scale.

Despite the US being number one in many different areas, in some places other markets are way ahead of us. I’ll choose something as simple as a cell phone as an example. Cell phone adoption rates overseas grew much faster and today the greater penetration is still overseas. We have the handsets here, but compared to the Europeans, we hardly utilize our cell phones for anything else but calls. Everybody else is using it for many different things. Not only for surfing the web or for messaging, but some use their cell phones as an electronic wallet to pay for goods and services.

There is a real cell phone culture overseas, boosted by the fact that they have one technology platform, GSM. Here we have maybe two or three platforms. There is no consensus and that's a problem. And many of the ring tones, wallpapers, and games that you can download onto your cell phone are produced overseas and come from Korea and Japan. We're getting their old technology and they are light years ahead of us.

The other area is that, for better or worse, Europe and Canada are more socialist and “green” than us and the governments have greater impact. There is some effort in the US but it is more talk than action. For example, at the ‘State of the Union Address’ in January, Bush talked about decreasing our dependency on foreign oil, but he hasn’t really backed that up with significant budget allocation or initiatives. It was just good sound bites, throwing a couple hundred million dollars, and that's it. It’s a feeble effort by comparison.

Meanwhile, in Europe they have a 2010 target to have 22% of energy coming from alternative sources. People scoff at the idea of windmills and we barely have them here, but windmills are prevalent in places like Denmark and Spain. Also, Germany subsidizes homeowners who install solar panels on their homes. They have net metering which give the homeowner the right to sell excess energy into the power grid and the utility must pay for it. It distributes the energy produced during the day because you’re not at home, for example, or when you’re not using as much energy. Effectively, you become a supplier of energy – a utility.

The solar space is an excellent investment opportunity. In fact, one of the biggest oil companies, BP, has a huge solar division. So if even the big oil companies are looking at solar, that should be telling you something. It means that they have been depleting oil reserves and oil is not going to be there forever, so they're looking for other ways to make money out of the energy business.

Q: Many people are not aware that the energy business is not the oil business.

A: Yes, energy now comes in many different forms and we have to open our eyes. But this is not something new outside the US. The investors have the opportunity to evaluate a portfolio manager who is in touch with the foreign markets and is knowledgeable enough to make the right investments with the U.S. dollar given to them. It’s also about being aware of the changes in the society. There are investment opportunities that are cultural and exist only within one country.

Q: Why do you prefer to invest in international small-caps? Aren't they more difficult to find and research?

A: They can be difficult but they can diversify away your risk and your volatility with only being exposed to the US. And small companies exhibit better growth profiles. Big companies, like IBM, GM, or Microsoft, create a task force or a committee to solve problems. Small groups get the work done. This is what these small companies do. They specialize in their businesses, which consist of only one or two things.

Most are very transparent, unlike Enron or a Tyco with all of their different divisions. As an investor, you don’t even know where they are making and where they are losing money. You don't learn that they are taking the profits from one business to supplement another until the annual report is out 13 or 14 months later, if you ever do. So smaller companies are far easier to understand, much more transparent, and more pure-play businesses.