Even if you look at the pharma industry, for example, a lot of the big companies outsource research to small biotech firms that specialize in say, cancer research. That alleviates the big pharmaceuticals from building an inhouse effort, which sometimes can be more costly. So many of the small companies are beneficiaries of the outsourcing activities of the large caps.


Another outsourcing idea, especially in this global economy is the concept of logistics. How does a European producer get his goods into the back roads of China? He knows there are customers over there, but he doesn’t know how to do it. Does he need to know how to do it? No. He needs to hire a company like Kuehne & Nagel, one of the world’s logistic leaders, and they will move his goods all the way to the final destination and take Asian goods and distribute them into Europe’s end customer.

Q: How do you find and crystallize your ideas? What is the process that makes a stock from your watch list into a holding on the portfolio?

A: It’s an interactive process with a lot of different components. The first one is a quant screen that helps us narrow down the universe because there are a lot of stocks out there. And being in this business as long as I have, I not only look at the names that float to the top of the list, but I also look at the industries to see if there is a pattern. It is important to note that some industries transcend global borders, like energy. Everybody around the world will pay $70 a barrel.

Q: Mining companies would probably also fall in the same category.

A: Yes, mining is a perfect example. A copper mine in Australia could probably benefit as much as one in Canada because copper prices are rising. They may have a different cost base, but if the price goes up, they both should incrementally benefit.

Secondly, we meet with many management teams throughout the year. We go overseas and they come to New York where I am located. We also go through the numbers; we attend conferences abroad and in New York. Sometimes they are thematic conferences, like an oil conference, or country- specific conferences.

But we do tend to invest on a thematic basis. From the whole idea about solar energy or natural gas, we’ll take the industry apart and seek opportunities to make money along the entire supply chain.

For example, the gas in the Middle East is in the ground and to get it out, you want to hire the number one engineering and construction company. Japan's Chiyoda is a small-cap company with excellent technology that gets the lion’S share of the projects there. It was recently awarded the largest liquefied natural gas project ever, $4 billion worth to build an LNG facility. That process takes gas out of the ground to a liquid state by cooling it, so that it can be transported by ship to the major markets, predominately UK, US, Japan, and China. Then you look at the fact that you need ships and you can invest in shipbuilders.

Q: You mentioned earlier that you have a bottom-up approach. Does that mean that you're looking one company at a time in local economies?

A: Yes, but as a quick extension I look for industry patterns. If I’m looking at oil drilling companies, maybe one’s better than the other or maybe there are three in great shape. So I’ll do comparisons between companies in the same business. I’ll examine a company, but what brought me to that name could be either the quant screen or the theme that I’m working on like the energy cycle, the metal cycle, or the tech spending, which hasn’t occurred. I’ve been a tech bear for about 3 years now.

Q: What are the most important elements of your risk control process?

A: We run performance attribution reports on a monthly basis, which lets us know what has been working and what hasn’t been working in terms of contributing to the fund’s performance. That's done on a country and sector level on a relative basis because you might want to really give up on some stocks. Then I have some customized reports that I run, such as stop-loss reports and some tools that basically throw problematic names in my face to warrant my attention. Otherwise, I have market- to-market reports all day long wherever I go around the world. One of the other risk controls that we employ is to not allow a single investment to exceed 2% of total assets for very long.