We have bi-annual risk reviews, which involve comprehensive risk reports that are put together by our quantitative team. We meet with the CEO, the head of the global, international area, the head of the quantitative team, and the person who’s running the product to see where the risk in the portfolio is coming from and control it. It’s not an allocation tool but sometimes it makes you aware of bets that you’re taking collectively. For example, if each fund is making a bet in Korea that doesn’t look big on the individual level, when you look at the bets in the entire portfolio collectively, you may realize that the bet is substantial. If 30% to 40% of your tracking error is coming from two names in Korea, then you need to decide if that makes sense and if you’re comfortable with the inherent risk implied by holding those types of positions.

Q: So you review the bottom-up selection made by the other fund managers to see if it makes sense on a collective level?

A: As the portfolio manager of this fund of funds, I’m just taking my proportionate share in each individual fund based on the allocation percentages. It’s about providing investors with the expertise of the various fund managers that we have for these particular styles and then packaging this all-in-one fund so that investors get access to this expertise.

The only time that I will change the allocation is if I feel we have too much exposure in any style orregion.

Q: Could you describe in more detail the concept and the holdings of the Research International fund?

A: It’s a sector-neutral portfolio because we realized that the bulk of the attribution was due to stock selection. Within each sector, the analysts make individual bets on where they can find opportunities. We don’t care what the benchmark says although it is a sector neutral portfolio. It is a portfolio that measures the convictions of our analysts because it’s run by the analysts.

Q: How do you approach researching the securities in emerging markets?

A: The Emerging Markets fund is based on the premise that we’re looking for companies that are undergoing fundamental operation improvements. We define that as increasing revenues, expanding margins, decent returns on capital, and free cash flow generation that’s sustainable and growing. More importantly, we’re looking to buy that at a discount relative to the respective sector.

It’s a fairly diversified fund and I believe that emerging markets represent a part of the world that holds a lot of promise and opportunities. This part of the world makes up 80% of the world’s population, has 20% of the world’s contribution to GDP, and yet, it only has 7% of the stock market capitalization. Today, emerging markets as a whole, sell at a discount relative to developed markets, while historically, they’ve sold at premiums. Yet, compared to where they were 15 years ago, emerging markets today are much more sound and in much better positions.

Q: We all thought we should expect scandals and dubious accounting practices in emerging markets but in the end it was Tyco, WorldCom, Adelphi and Enron in the US.

A: Exactly. Whenever anyone asks me if I can trust those companies, my question is, “Do you mean you can trust US companies?” In the most followed, most regulated market in the world, you have WorldCom, Tyco, Global Crossing, etc. Yes, the transparency or the accounting in some of the emerging markets can get better but we’re a long way from where we were 15 years ago. These are still evolving markets but we have never had such scandals.

We aren’t even close to seeing the emerging markets full economic potential. Yet, on a monthly basis Indian cellular companies sign up 4.5 million subscribers or for the first time banks in Eastern Europe offer mortgages or loans. It is a different era of consumers driving the economy in the emerging markets.