Q:  What are your core beliefs that form your investment philosophy? A : We start from the premise that the market is not efficient, that stock prices will stray from proper reflection of the value of the company at any given time, but eventually those two things will come back together. We want to take advantage of finding those potential investments where we think the company’s value is higher than the valuation in the marketplace. We also believe that it is important to control risks as much as seek return. We make sure that we understand what kinds of risks are in the portfolio and either decide to accept them because we think they will be rewarded or, if we do not, either avoid them or find a way to negate them. We also believe in diversification. We do not run concentrated portfolios, although I have had comments from others who have looked at our portfolio who think it is more concentrated than some investor’s portfolios. We are not trying to closet index, but we are also not trying to pick 15 or 20 stocks and invest a large portion of the portfolio in them. We are running a broad-based international portfolio designed to give diversification benefits to a U.S. based investor. We also keep the portfolio geographically and economically as diversified as we can within our valuation constraints. Q:  How do you use this philosophy to develop your investment research? A : We start with an overall view of what is going on in the world economically. Huntington Asset Advisors has the benefit of a very capable economist who does a very detailed economic forecast on a monthly basis. It is very useful in making sure we catch little changes at the margin that we might otherwise miss. From that economic forecast, we develop a view of what the overall shape of the portfolio ought to be in terms of both regional and sector allocations to capture what is going on in the world. The rest of the process starts from the bottom-up by selecting individual stocks that would populate those allocations, both regionally and by sector. We want to purchase stocks that are adding value after their cost of capital, that have strong balance sheets and are priced at a discount to what their growth rate and earnings would imply. This valuation should also reflect an appropriate risk level for the company. We research whether the company is financially sound, if it is adding value over its overall cost of capital, and whether we can buy the stock at a discount to the growth rate at which we think it can grow. We also use several different more quantitative methods to check what we are doing in terms of fundamentals. We use a couple of different services that rank stocks according to their stock price momentum, their overall profitability rate, and valuation. We also use these services to look for companies that score more favorably in that valuation ranking. We also do the same thing with the earnings progression of the company. We use a ranking service that looks at that process as well. As a final check, we look at where the stock has traded in the past several years. We also look at annual and interim reports to get a sense of what management thinks is important. That is also a good way to get a sense of who their competitors are and how they compare to the rest of their industry. Q:  So you try to convert the top-down and the bottom-up and that is how you come up with your selection in the end? A : Yes, the process goes down from the top by using economic and market trends to establish the overall “shape” of the portfolio, and then from the stock level to choose the individual equities. Controlling risk is also an important part of the process. We look at the overall risk profile of the portfolio on a risk management system. We do this to get a sense of what that system thinks our risk profile is in terms of fundamentals of companies and unique stock risk. We capture some style factors in the portfolio. These style factors include the size of companies we are using or whether we have taken any risks in terms of our allocation to various sectors. We want to make sure the risks reside where we think they are as opposed to lurking in some other area that we have not thought of before. We also monitor position sizes in the portfolio. If a position does well and gets too big, we will cut it back. In addition, we monitor fundamentals on an ongoing basis, so if something changes in the fundamentals that we thought existed when we bought the stock, we go back and question the original purchase. Our backward looking work over the years has indicated if the fundamental reasons that we had in place when we purchased the stock go away in any significant measure, it is probably a good idea just to bail out at that point. Q:  Maybe we can take one or two examples of historical holdings that you had that kind of explain how you identify a stock. What research steps do you take to investigate investment merit? Additionally, once it becomes part of your holding, how did you harvest it? A : Two or three years ago, Syngenta, a Swiss company, resulted out of the merger between Sandoz and Ciba-Geigy. They both had agricultural products divisions. They put them together into a separate company, spun it out, and gave it the name Syngenta. We always find spinouts interesting, especially when constructed this way because nobody generally follows them and they are not correctly valued in the market when they first hit the market. We knew that agricultural prices were very low but that there was a lot of research going on in to add value to the kinds of products that a company like Syngenta sells. They are one of the leaders in products like GMO corn, cottonseed, and other enhanced seeds. We took a position in the stock because it fi t both on the company level and fit into the overall allocation in the portfolio for material stocks and for European allocation. We have held that one for four or five years. The stock did not do much at the beginning and occasionally the price would go down. If there were some ruling in the European Union against genetically modified seeds, the price would go down although that is not a huge part of their business. We would just add to the position since we felt the fundamentals were still there. Over the last couple of years, the stock has done very well. A couple of times, we have cut back the position because it got too big relative to the rest of the portfolio. When a stock goes up and its relative valuation increases, the risk associated with it increases, which calls for a smaller allocation. It is still in the portfolio after we have cut it back about three times over the past two and-a-half to three years and things seem to be developing as we thought they would. Q:  How has Syngenta developed their business? A : They are a research-intensive company and make their margin on value added products, not commodity products in the agricultural market. We also felt that agriculture was undervalued by the market, and that the market for genetically modified seeds would eventually start to grow as the usage picked up in various parts of the world. That is what has happened. Latin America is now a big user of genetically modified seeds and even the European Union has relented and allowed some of this product to be sold and planted in Europeans fields. At the same time, the company has maintained a good financial position. They are earning on their cost of capital and the valuation remains reasonable, although on a relative basis, it is higher than it was when we first purchased it. Q:  What do you do when your research idea does not work out? A : Until recently an overall top-down concept that was not working very well was a near market allocation to Japan. That was painful in 2007. Although the overall numbers turned out all right, we would have been better off to have less of an allocation. The decision was based on a top-down view that there were a lot of good things going on in the Japanese economy that were not being reflected in terms of individual stock valuation. We went into 2008 with a full weighting in the Japanese market and it has been a much happier experience since the first of the year, but on a top-down basis, that is one we wrestled with several times during 2007. Q:  How do you build your portfolio? Generally, how many countries or regions in the world you are? How many holdings do you have? What kind of portfolio turnover do you have? Moreover, what benchmarks do you consider yourself measured against? A : Our official benchmark is the EAFE index, the MSCI EAFE, although we will buy stocks that are not in the EAFE index. We do include Canada and Latin America as parts of our portfolio. We maintained stockholdings of about 60-70 stocks at any given time. Because our process is based on fundamentals of companies and the valuation of their stocks, we are really looking out two or three years on a time horizon when we buy something. Consequently the portfolio turnover is anywhere from 25% to 30%. If things are moving around a lot, our portfolio turnover is maybe 35% a year. I have never seen it go any higher than that. The top 10 holdings are anywhere from 20% to 25% of the portfolio. However, you are not going to find any one position that is going to be more than about 3%. We do take the top off positions that have done really well. We try to maintain investment in the major regions of the world at all times. This is a diversified portfolio intended for investors that do not have any other international exposures or who wish to maintain a diversified exposure through their holding in the fund. We are not going to have most of the portfolio in Asia or Europe, or have no investment at all in the Americas at any given time. It is broadly spread and we try to keep the country allocations at or below their weightings in the index and add value through the stock selection. We are not trying to add value through country weightings. It is more of a regional and economic sector view of constructing the portfolio rather than a country weightings process. We do this because many companies have multiple geographic exposures. We have emphasized large cap companies. We will buy multiple market cap sizes in the portfolio, but our topdown strategy was really focusing on the largest companies in the past yea rand- a-half. At that level of size, almost every company you buy has exposure in almost every part of the world in varying degrees, so even regional exposure is getting more difficult to pinpoint. The same is true of currency exposure. Q:  Do you hedge for the currencies? A : No, we do not hedge. We have not ever directly hedged. There were times when that would have been helpful, but not in the last decade. We may eventually do that; however, we think it is much more fruitful to look at the currency exposure of the individual companies that we are buying. Q:  How has inflation in Asia affected your global view? A : It is going to slow economic activity simply because their money supplies are growing too fast. There is too much building, too much productive capacity put in place, and it is putting a huge strain on the cost input side of things in those markets. At the same time that the domestic end users are being squeezed on food and energy prices. Recently, some countries like Malaysia that were subsidizing oil prices are saying they cannot afford to do it anymore. Therefore, it is going to hit the domestic consumer in some of these countries hard when those subsidies come off. Moreover, it could lead to some political upheaval. We do not necessarily avoid those markets; however, we are careful to make sure we are not overexposed. We try to position away from the full force of the negative trends. It also makes us more cautious on valuation.