There had been management changes at Daimler Chrysler in the previous year. The stock had gone to sleep whereas other companies within the sector where there had been management changes the stocks had seen some semblance of revaluation. There were three catalysts to lead me to invest within the company – one, I’d identified the stock with significant valuation upside; two, the marketplace as a whole was very underweight in the automotive sector so in the future there were likely to be more buyers of the sector rather than sellers; and three, Daimler Chrysler was by far the largest in the sector so that would be a major participant if the auto sector outperformed.

Q:  What could be a catalyst for a sell decision?

A: I monitor all the companies within my portfolio against what I think that company is worth on an absolute basis. When the companies are reaching the appraisal value that I’ve attributed to them I will be looking to replace them with companies that have better prospects or I’ll be reviewing my appraisal values to factor the changes in the marketplace.

Q:  Do you measure yourself against a particular benchmark?

A: The benchmark we are working towards is the FTSE Developed Europe ex-UK Index.

Q:  What kinds of risks do you monitor and what do you do to mitigate them?

A: The benchmark is part of the risk determinant because as far as risk management is concerned we have a tracking error of 5% versus the particular benchmark. That 5% doesn’t constrain me in any major ways at all.

Ours is a fairly tight portfolio - I tend to operate with 40 to 50-stock list. There’s a reasonable diversification within that to spread the risk.

Another way to spread the risk is to look at the three broad sector categories because I aggregate those to see where fund positions are in financials, cyclical, and defensive stocks. Although I will take large positions against the benchmark weightings, I always have a presence in each broad category.

In December 2006, the fund’s risk parameters were relaxed slightly to allow me to express my higher conviction investment approach. The fund’s tracking error constraint widened from 3% to 5% and I reduced the minimum number of stocks from 60 to between 40 and 50. Previous constraints as to what I could hold in each sector and each stock also changed to help me generate the performance demanded by investors.

Q:  Are there certain areas or industries that you would avoid?

A: I think that alternative energy stocks are a bubble and they’re extremely overvalued. They’ve got pumped up on the back of the news flow from environmental campaigns. They’re inherently small or mid cap in nature and if you tr y and buy the stock you’re more likely to have a positive impact on the share price.

Over the last year the number of stocks that have come to market has increased purely because of high investor demand and not because of proven industry fundamentals. You have a situation where you’ve got companies that are very highly valued and there’s more supply of new companies coming to the market from what had been an undersupplied market.

Q:  Your valuations are based on forward looking earnings. How do you handle a situation in the financial sector when suddenly all the earnings estimated are inadequate and many large banks are reporting losses when estimates were for large profits. What do you do in such situations?

A: Everybody in that scenario was wrong and even the most respected stock market analysts in the banking sector had been in the dark to the extent of the sub-prime problem. So what I tr y to do in such situations is mitigate the risk.

First of all, I look to see where other funds are positioned within the sector so I can mitigate my relative risk against the competition. The tendencies in that situation are to move to a more neutral position versus your competition and your benchmark, and on a stock basis see which stocks hold up well on valuation even with aggressive earnings cuts.