Q:  Would you give an overview of MTB Investment Advisors? A : MTB Investment Advisors was formed in 1995 as a registered investment advisor and a subsidiary of M&T Bank, which is headquartered in Buffalo, New York. The Midcap Growth team is based in Baltimore, Maryland. MTBIA provides investment advisory services to not-for-profit organizations, pension programs, corporations, endowments, foundations, municipalities and unions. In addition, we serve as advisor to the MTB Group of Funds, a family of mutual funds designed to meet a wide spectrum of investment objectives. I have been the portfolio manager of the MTB Mid-Cap Growth Fund since June 2003. I run the fund with a team of three sector analysts and a quantitative analyst. Q:  How would you define your investment philosophy? A : The cornerstone of our investment philosophy is the premise that shareholder wealth is created by early recognition and sustained ownership of superior companies. We focus on identifying companies where the full potential of the company’s franchise is not fully reflected in the stock price. Q:  What is your investment strategy? Why do you focus on mid-cap companies? A : We look for companies with superior growth prospects relative to the broader market. To us, midcap means between $2 billion and $15 billion in market cap at the initial purchase. We are looking for durable business models, consistent with our buy-and-hold philosophy. Mid-caps have attractive characteristics that can generate solid long-term returns. For one thing, they have progressed beyond infancy, with the financial and operational risks that the early stages of development entail. Many of these companies have progressed to the point where they have got international opportunities. This may reduce the company’s risk profile and increases its addressable market. At the same time, many mid-cap companies have not reached the point where sustaining growth becomes a challenge, which can become an issue for large-cap companies. In addition, the mid-cap market segment appears to be an underinvested area of the market, since many asset allocation schemes include only large- and small-cap buckets. This lowers the competition for good mid-cap ideas. Q:  How do you carry out your research process? A : We have a fundamentally driven process, supported by quantitative analysis. Investment ideas arise from a range of sources. Some come from contacts with companies or our involvement in industry conferences; quite a few of our ideas are generated through observation of the real world or our reading. After an idea captures our initial interest, we go through our fundamental analysis. A core focus is identifying the keys to growth: what is the overall market potential and what is this company’s competitive advantage? Then, we want to identify if we have an exploitable insight relative to what is reflected in the consensus. That is, what do we see that is not already reflected in the current share price? Where do we expect the upside to come from? We look for well-positioned companies with attractive growth prospects, solid -- and ideally expanding -- margins, good cash flow generation ability, a healthy and ideally growing addressable market, attractive return on invested capital and reinvestment opportunities to sustain growth, proven management, and a solid balance sheet. We focus not just on financial analysis, but on a good business model. We’re looking for company with compelling products or services, and an identifiable, sustainable competitive advantage. These strengths ultimately underpin revenue growth and pricing power and determine the returns to investors. In terms of valuation, we are looking to pay a multiple that is appropriate to our estimate of the company’s growth prospects. We are sometimes prepared to pay what appears to be an aggressive multiple if our analysis suggests that investors underestimate the company’s earnings potential. Our proprietary quantitative model embodies these same principals. It is a useful, objective tool that helps us both with idea generation and risk analysis and control. Every week we run our models to rank the investable universe based on forward looking return forecast. And we can check the results against our fundamental investment thesis. Q:  Could you illustrate your research process with a couple of examples? A : Joy Global Inc. is a good example of an idea that started from a higher-level insight: the growing demand from metals and minerals resulting from the industrialization of China and other developing countries. Joy manufactures and services equipment for mining coal and other mineral resources. We were – and still are – attracted to Joy Global because of attractive end-market growth potential, a solid financial model, a good record of execution, and limited competition in a space with high barriers to entry. We have also had success with Lululemon Athletica Inc., a manufacturer and retailer of yoga-inspired athletic apparel. That was more a bottoms-up idea. We are certainly aware of yoga’s growth as an activity, but what convinced us on the name was the strength of the financial model. The company has modest size stores and good inventory control, high sales per square foot, little marketing expense, healthy margins, solid cash flow, a strong balance sheet, and a small store count with room to grow. We also saw – and still see -- the opportunity to extend the model beyond the core yoga franchise into men’s and women’s athletic gear. We purchased the stock at a multiple appropriate to our estimate of the company’s growth outlook. On the face of it, it looked expensive, but relative to foreseeable numbers, the valuation looked attractive. Lulu’s execution has been solid and they continue to pursue a disciplined, measured growth strategy. The investment has worked tremendously well for us as more people came to recognize that this is a growth story with sustainable potential. Q:  How do you build your portfolio? A : We run an actively-managed product. This is reflected in our high active share statistic, or the degree to which our positions deviate from the benchmark. We maintain financial models and target prices on our holdings to guide our trading. We are biased towards buy-and-hold; our turnover for the past year is under 40%. However, we are constantly looking for opportunities to move capital towards names in the portfolio – or new ideas – with greatest upside from current prices. When we identify a good idea we try to exploit market volatility to allow us to develop the position to a target size. The position size will reflect our upside return expectations and confidence in attainability of that upside. Q:  What is your buy-and-sell discipline? A : We buy a company with certain expectations of its ability to grow revenue, expand margins, and generate attractive returns on capital. We get out of positions when our expectations of the company’s ability to grow its earnings and cash flows are proving to be mistaken. We will not sell a name simply because the share price has moved against us. We need evidence that our growth thesis will not be validated. Occasionally, we sell a name if it has graduated beyond our cap range, but this is, of course, a good thing. Q:  What are your views on risk and what do you do to mitigate it? A : We closely manage our risk profile. We diversify by individual stock, industry, and sector. We monitor position sizes, sector allocations, forecast tracking error and beta relative to our benchmark, the Russell Midcap Growth index. For an individual stock, our maximum active weight would be 3% difference relative to the benchmark weight. The sector limits are 5% deviation from the benchmark weight or a 50% variance, whichever is the greater. In addition to our risk-control guidelines, our quant work gives us a comprehensive understanding of our portfolio risks. We use risk models to monitor our exposure to factors such as portfolio beta, and financial leverage. The principal risk is, of course, the mis-forecasting of a company’s growth potential. We will be disappointed as shareholders if our expectation of a company’s growth is not achieved. This is where true losses – as opposed to daily market volatility – come from.