In terms of the sector versus regional issue, our analysts have a hybrid structure. We have a team of industry analysts, but in some cases they tend to be more global in nature. For example, our resources analyst takes a global view, while the mandate of a telecom analyst might be more regional. We also have regional analysts who cover some of the stocks that maybe don't fit neatly into one of the industry categories. We have analysts in Japan, Asia, Latin America, and Europe. They are the most important source of ideas and coverage at the fundamental level.

We also have some quantitative inputs, which I mostly use to get things on my radar screen and to focus. We combine the valuation and the factors driving stock performance into a single score for each stock. A low score doesn't mean that we wouldn't look at the stock and a high score doesn't mean that we'll buy it, but it helps us focus.

At the end of the day, the process is very much fundamental. We're looking at the quality of earnings, the company's prospects, and the valuation. Do we think that the management team is competent and has some integrity?

What are the industry dynamics? How competitive is the industry? What are the threats of new entrants? These are the important questions.

Q: How do you make that assessment? Do you travel to meet management teams or visit the companies?

A: In many cases, yes. Ideally, we would meet the management team of every company before we invest in it. We would talk to all the suppliers and customers and that would probably take about a year and a half. At the end, we would have an incredibly deep understanding of the company, but 99 times out of 100, by that time the stock would have moved up and it would be too late to invest in it.

Investing is a very interesting pursuit because on the one hand, the rigor can really pay off, but on the other hand, the market is intelligent. There are a lot of smart people that are constantly working to gain an edge over you. Sometimes one has to trade off the rigor and the thoroughness against the opportunity cost.

So if we find an idea, I'll research it and our analysts will research it. We'll talk to people and we'll certainly want to meet the management team whenever we can. But if we're not able to meet the management for three months and everything else points to a great investment case, I wouldn't wait, because of the opportunity cost.

And with value investing, often you just need the management to be competent enough to let the natural tendencies of the company and industry dynamics work themselves out for earnings to recover. If the management is stellar, the stock will probably be an expensive one because it's discounting that tremendous management talent.

Q: How do you approach portfolio construction? What is the number of stocks in the portfolio, the turnover?

A: I tend to own more stocks because I want to make more decisions to generate more alpha. The big resource base of the firm enables me to spread whatever skill I have over more investment cases. I tend to own between 100 and 200 stocks, usually in the high 100's. There's no magic number, but that's just where it comes out.

If this was a domestic fund, the number of stocks would probably be lower, but I do believe in mitigating risk internationally. It doesn't mean following benchmarks, but means spreading out the geographic risk because of the country and regional effects. Owning stocks in each market and across sectors leads to owning more names.

Turnover is fairly low, typically around 30% per year, because we allow time for the valuation anomalies to play out. Our expertise and skill lie in a longer-term approach, so we're typically holding stocks for two or three years and sometimes longer. Of course, that low turnover also tends to keep transaction costs down and I'm a big believer in doing that.

Q: What is your view on managing risk?

A: The most fundamental way to manage risk is to buy the right investments. I clearly want to buy a stock where the price is going up, but I also look very hard at the downside. I want to invest in stocks where there's an asymmetry, where the upside is not only more probable, but also potentially larger than the downside.

That's another place where dividends and share buybacks come into play. For example, Royal Bank of Scotland has been out of favor, but the company is growing its earnings. It's well managed and has a dividend yield of around 4%. It has operations in the UK and in the U.S., which are relatively stable. I think that the risk/reward is asymmetrical and the chance for this stock to do well is greater than to suffer a large fall.

Stock-level positions are paramount, and sector and regional positions are important, but there are other factors worth considering, such as how much style exposure do we have, do we own smaller or larger companies, do we have exposure to momentum stocks, etc. For example, value stocks in general have done better than growth stocks over the last few years and it pays to at least know where your bets are. We do fairly sophisticated risk analysis to know what our exposures are to the different factors in the market beyond just industries and sectors.