Q:  Generally, what is your turnover both in names and in dollar amount?

A: As long-term investors, we have the ability to use volatility to our advantage. We trade to maintain our best risk-adjusted portfolio with a focus on our long-term goals. This approach has resulted in turnover statistics in the 150%-200% range. However, the name turnover is less than that. In a given year, it is probably more like 60% or 70%, reflecting our longer-term view.

Q:  Any small cap names worth mentioning?

A: We recently bought a small-cap company called B&G Foods, a manufacturer and distributor of shelf-stable foods like pickles and baked beans. B&G Foods had been an unusual security, as it was a hybrid of equity and debt. At first, we avoided it as it sent confusing signals, and the debt aspect was unattractive. However, the company decided to convert all of the hybrid securities to common stock.

The initial dividend was around 6%. Our consumer sector analyst Kristin Ketner-Pak thinks that management’s track record is solid, the dividend is well covered and the balance sheet is strong. Some of their bigger competitors such as Kraft and ConAgra are downsizing. A small company like B&G can create equity value by acquiring brands that have not been focused on and invest and grow these brands.

Q:  What are your buy and sell disciplines?

A: The biggest catalyst for us to sell a stock is when relative valuation becomes less attractive to other stocks in the portfolio or our watch list. Our goal is to improve the overall risk/ reward of the portfolio. For example, we are finding good relative values in the REIT, MLP, and Utility sectors (dividend centric stocks which are most interest-rate sensitive). These sectors have all gone through healthy corrections. To fund these purchases we trimmed/sold some of our existing positions. The driving force was incrementally positive risk/reward relative to some of our existing holdings.

The net effect was an increase in our current yield, now roughly 4.3% and up about 90 basis points since June 30th.

Buying and selling decisions are also based on our long-term focus of a company’s expected performance over the next two to five years. We sell a stock when the company fails in our expectations or dividend growth starts to slow.

Q:  How do you mitigate portfolio risk?

A: We classify the portfolio into three main categories - dividend centric, non-cyclical and cyclical stocks. These classifications enable us to actively manage our portfolio risk. We tr y to find the best risk-adjusted valuations within these three categories.

Within the cyclical category, it’s our belief that we are late in the basic materials cycle and the stocks are generally not attractive. We believe that the information technology sector is relatively more attractive driven by the long-term secular growth in broadband, wireless, and software. Consequently we are overweight technology and underweight basic materials relative to the index.

Figuring out what the market is assuming is also important in tackling risk. Earlier this year we felt that the market did not appreciate interest rate risk. This led us to underweight dividend centric stocks. Recently the market went through a sharp fear driven correction caused mostly by the subprime debt fallout. The market extrapolated this into a major crisis and many cyclical stocks not directly related to consumer mortgages were penalized. This caused us to take a fresh look at the two to five year outlooks and make any necessary adjustments to our risk-adjusted price targets. We took advantage of this market volatility, adding to stocks that have good opportunities to create equity value and grow dividends. We bought these stocks at what we feel are very attractive prices.