Q:  What is the background of the company? A : Al Frank manages two mutual funds: the flagship Al Frank Fund, which was launched in 1998 and The Al Frank Dividend Value Fund which was launched in 2004. Al Frank, the company’s founder, launched an investment newsletter called “The Prudent Speculator” in 1977 and then subsequently launched Al Frank Asset Management as an independent asset advisor that now has over $425 million in assets under management. These assets are distributed among separately managed accounts and the two proprietary mutual funds. The mutual funds were started on the bedrock of a belief that value-oriented strategies will outperform the market over the longer term. The Al Frank Fund aims for long-term capital appreciation while The Al Frank Dividend Value Fund focuses on long-term total return from both capital appreciation as well as dividend income. I have been managing both the funds since their inception. Q:  How do you define value and what is your investment approach? A : Our investment approach is centered on a value-based strategy with an emphasis on capital appreciation over the long-term. We seek out those stocks that are out of favor and are trading for low multiples of earnings, sales and/or book value. We are a go-anywhere manager focused on uncovering bargain-priced stocks without market capitalization constraints. If you look at all the data that is available in the market, you will find that stocks trading at low price-to-book ratios have historically outperformed those trading at higher price-to-book value ratios. Similar is the case for low price-to-sales ratios and low P/E ratios. Of course, the trick is to determine the reasons that a stock may be trading for an inexpensive price tag. Sometimes, there may be legitimate concerns that would preclude buying a cheap stock, but if the underlying business is sound and the long-term earnings prospects are good, we are willing to buy companies that are enduring a cyclical downturn, lack of near-term earnings growth or some other what we believe to be temporary problem. Experience has shown that stocks can go to extremes on both the downside and the upside. Our objective, not surprisingly, is to try to take advantage of these sometimes short-sighted price movements. Q:  Do you consider dividends for your stock selection? A : We are always looking at dividends as part of our stock selection criteria, but the Al Frank Fund does not require its members to be dividend payers. Our second mutual fund, The Al Frank Dividend Value Fund, does have such a requirement, so its universe of eligible holdings is simply a subset of those from which we are able to select for the flagship fund. History shows that dividend income forms a substantial portion (2.5% to 4.2%) of the total return from equities that has ranged somewhere between 9% and 11% per annum over the last eight decades, so dividends are certainly an area of emphasis in our selection methodology. In fact, we are willing to sacrifice some capital appreciation in exchange for dividend income as our concern is with the total return of each of our holdings. Our experience also shows that dividend-paying stocks have tended to be less volatile, so from a risk perspective there is an advantage to a dividend emphasis. And this is especially true today, given all of the uncertainty about the health of the economy and the quality of corporate earnings Of course, many of the stocks in Al Frank Value Fund do not pay dividends and we are fine with that because we think that the capital appreciation in the long-term is going to be greater, sufficiently compensating for the lack of dividend income. Q:  What is your research process? A : We have a universe of about 600 stocks that we actively follow. Our team consists of three people in research and three in portfolio management, besides yours truly. In all, we have seven members that are actively involved in the research and portfolio management process. We start the process by setting a target price for each stock that we think it deserves to trade for over a long-term, five-year time horizon. Once we have set our target prices, we look to buy those that trade for a significant discount, i.e. those that offer handsome capital gain and/or dividend income potential for a given unit of risk. We are always focused on the long term, but that certainly does not mean that we hold our stocks forever as our strategy is ‘Buy and Harvest,’ not ‘Buy and Forget.’ We know that it often takes time for our undervalued stocks to reach their potential, but we are constantly evaluating the risk/reward profile and we will not hesitate to take action should conditions change. Q:  Would you discuss your historical stock picks to highlight a few examples? A : We have recently bought into the toy maker Hasbro, Inc. (HAS). When we looked at this stock in our valuation process, we found it to be trading at the lower end of the historical norm as the forward P/E ratio was 13. Because Hasbro has great brand names (Monopoly, Clue, Battleship, etc.) and exciting prospects on the movie front (Transformers, G.I Joe and a few others on the horizon), we think this quality company deserved to trade for a higher valuation over the long-term. And the stock was also sporting a dividend yield of 3%, further adding to its appeal. Other names that we have been adding to portfolios are Bristol-Myers (BMY) and Abbott Laboratories (ABT) in the pharmaceutical space. This is a sector that has really lagged in the rebound from the March lows, but these companies have solid balance sheets and generous dividend yields, not to mention favorable earnings prospects. Yes, there is a lot of uncertainty in the healthcare sector, but we think both BMY and ABT are well-positioned for the long haul. The giant discount retailer Wal-Mart (WMT) is another that we have been buying as the valuation remains compelling and the stock is now affording an attractive entry point, given its underperformance in 2009. Same thing can be said for BB&T Corp (BBT), MDC Holdings (MDC), Marathon Oil (MRO), Intel (INTC), Verizon Communications (VZ) and Raytheon (RTN). While these names are not likely to double or triple in price from here, they are also not likely to end up on the scrap heap. Doesn’t mean that we aren’t willing to take some risk as we’ve seen many of our financial and smaller-cap stocks soar since the market bottom, but we always strive to have a favorable risk/reward profile. If we are going to accept outsized risk, the upside potential must be extraordinary. Q:  Is there any limit to the market cap of companies that you invest in? A : We have no limit to the market cap of companies we invest in. We are a go-anywhere, all-cap manager and we think that constraining the investment universe by market-cap or style-box restrictions is likely to limit potential returns. That being said, we are generally classified as a mid-cap fund by the ratings agencies because our small- and large-cap holdings tend to average out to mid. Interestingly, we actually have a relatively small number of mid-cap holdings, so we really think that all-cap is a much better classification than mid-cap. Q:  What is your benchmark index? A : Our benchmark is the Russell 3000 since we are an all-cap manager with this index offering the best choice for the universe of stocks from which we are working. We are a value manager, but many of our stocks do not fit neatly into a value style box, meaning that we have representation across all of the nine squares on the Morningstar tic-tac-toe board (Small-Mid and Large on the Y-axis and Value, Blend and Growth on the X-axis). Of course, we do not manage to a benchmark as our bottoms-up approach means that we may be overweight in some sectors and underweight in others. We do believe in broad portfolio diversification, so this over- or under-weight is usually not very large, but we are always seeking to go where the bargains are found, so if one sector is expensive while another is not, we will have greater exposure to the latter. Keep in mind also, that we do not make large bets on any one particular stock as the largest holding in The Al Frank Fund is not much bigger than 1% of total assets. Q:  How many stocks do you have in the fund and what is your turnover? A : We have about 200 stocks in the fund and our turnover is somewhere in the 15% to 20% range. This year we are even lower than that. Of course, when most people talk about turnover, they are concerned with the tax efficiency of the fund. In this regard, our long-term orientation and broad diversification have always allowed us to be tax friendly. Q:  What are the kinds of risks that you identify and how do you control them? A : Most investors equate risk with volatility. While we are not unduly concerned about short-term market fluctuations, we do think that our broad sector and stock-specific diversification provides downside protection, which is generally what most folks truly are worried about when they think of risk. Certainly, we believe that our basic approach of buying inexpensive stocks in the first place and having the willingness to patiently hold provides additional risk mitigation, but we are constantly evaluating the risk/reward profiles of each of our holdings, with the appropriate adjustments made when warranted. Q:  Are you always fully invested? A : In the mutual fund world there are always inflow/outflow issues that need to be dealt with, so we always must keep some cash in reserve. Presently, we are running about 2% to 3% in cash, which we would consider a fully-invested stance. While we reserve the right to have a higher cash position, we have always found plenty of undervalued stocks to buy, so the Fund has never had much more than a few percentage points in cash during its 11 year existence.