Q:  What is your investment philosophy?

A: I look at one company at a time because I value companies on an absolute valuation method. I don’t look at companies relative to the other companies within their sector or their market. I look at companies on a standalone basis and review that with my top-down macro view of the world. This helps me determine my overall investment allocation in three broad categories - financials, cyclical, and defensives. My view of the economic cycle will determine the relative weightings among these three sectors.

I value all individual companies on an enterprise value (EV) to capital employed basis. I look at the return on capital employed that these companies are generating against the cost of capital for each company. For example, if an individual company earns a return on capital of 10% with a stable cost of capital of 10%, I would value that company on an EV to capital employed at a ratio of 1.

I also make an adjustment for growth within these ratios as well because the valuation approach does not recognize growth in return on capital. For financial companies I use a price to book value calculation rather than EV and then compare that with a return on equity versus cost of equity.

We are looking at forward earnings to determine our valuations.

Q:  How is your research process organized?

A: I meet approximately 400 companies every year, either within our offices in London or during my trips. That gives me a broad knowledge of the underlying stocks within the marketplace. I’ve been looking at these stocks since 1991, so over the years I have managed to establish a good knowledge base on the majority of the larger cap stocks within the European markets.

Our European equity team is small but focused, with two fund managers carrying out research in all sectors. We look at sell side research and we identify the best analysts in each sector; we will look at a selection of work on a company; we’ll challenge the assumptions that are made in the building up of the numbers in the profit and loss accounts and balance sheet and then base our valuation calculations on that.

I’ve also developed my own internal screens for the top 600 companies in Europe. I can look on a general basis and determine what I think each company is worth on my valuation criteria.

Q:  How do you go about constructing your portfolio?

A: My approach to portfolio construction uses a contrarian style. I follow the Merrill Lynch survey of portfolio managers’ asset allocation by sector and see where the overweight and underweight positions are in people’s portfolios. If I see that, within the Merrill Lynch survey for Europe, a particular sector is overweight and popular among fund managers and my asset allocation reflects a similar bias, I get uncomfortable and will review my positions closely. I fear that a popular sector may not be able to attract new funds in such a scenario.

Similarly, if the majority of managers are underweight in a sector, that’s where I’m going to look for stock ideas.

Q:  Do your investment decisions depend on macro-economic events?

A: Yes, my portfolio construction has a view on the macro economic backdrop in the marketplace because stocks don’t operate in a vacuum and their profitability is often dependent on what happens within the economic cycle. If I think we are in the early stages of the economic cycle the likelihood is my portfolio will be significantly overweight with cyclical related sectors and if I think we are towards the rollover phase of the economic cycle, then I’m more likely to be defensively biased.

In order to determine where we are in the cycle I’m looking at leading indicators of economic growth. Then, within each of those areas, whether it be cyclical, defensive or financial, I’ve got other screens that I look at to determine where the value lies.

I also look at macro trends for the global economic cycle. The U.S. is entering a recession and I think this will lead to a slowdown within the emerging market areas as well. A lot of the western European companies over the last number of years have outsourced a lot of their supply to Eastern Europe and to the Far East so, if growth within the U.S. and Europe slows down, this will have an impact on those eastern European and Asian companies.

For example, if you’re a capital goods company within Europe and you’re outsourcing your sub components from Romania or China, you’re going to cut back on your orders to those nations. It’s a lot easier to cut back on workforce within those remote areas than it is domestically where you might have political opposition to doing so.

If you look at my portfolio in the broad sector categories, at the moment I’m 10% underweight in the cyclical sectors within the marketplace, I’m 6% overweight in the defensive sectors, I’m 1% underweight in financials and I’ve got 5% cash. So my positioning is for a slowing and weakening economic cycle.

Q:  Could you highlight one or two stocks and explain how you identified them and why you added them to the fund?

A: In January 2007 I bought a significant position in Daimler Chrysler (now Daimler). The automotive sector was probably the most underweighted sector within the Merrill Lynch survey of fund managers. My screening work on valuation within the sector showed that virtually every automotive company looked extremely good value with significant upside if the numbers were correct. That led me to do a lot more work on the underlying automotive companies and to go to an overweight position within the auto sector.