Q:  What is the investment philosophy of the fund and how is it different from other funds in your group?

A: Our philosophy is finding undervalued investments. We believe that the market often overreacts and underestimates a company's ability to create value over time. It may be a simple philosophy, but it's one that has worked. We tend to be longer-term investors because valuation anomalies often take several years to play out.

If you're buying stocks that are less expensive, even in the absence of information, there's a tendency for the market to equalize and for less expensive assets to come back. In other words, the price can be its own catalyst and that's one of the inherent benefits of value investing. For example, the low price may provoke a buyout or may cause the management to work harder to increase the company's and the stock's performance.

The fund has an emphasis on companies that return cash to shareholders primarily through dividends and also through share buybacks. That's important because it shows management's discipline and concern for the shareholders. At the end of the day, it's a tangible reward and evidence that the company is making money. The exact mechanism of returning cash to the shareholders is not quite as important, but I prefer dividends because part of the fund's mandate is to provide some level of income.

Q:  Running an international fund obviously requires proper balancing decisions. Do you rely on cross-country or cross-sector comparisons?

A: We look both across sectors and across countries. For sectors like autos or technology, one needs a global approach. At the other extreme, in a sector like utilities the local market effects are extremely important. It would be a big mistake to compare the valuation of a utility company in Japan or Australia to the valuation of a utility company in the UK.

The drivers to the top line and the profitability of these companies are very much localized; the regulation is very much localized. In technology, it's quite the opposite. The country effect is largely overridden by the global sector effect.

For example, Japanese P/E ratios for years were very high because earnings were very low, not because the market was doing well. Lately we've seen the market picking up, but P/Es still look higher than in most parts of the world. Short-term interest rates in Japan essentially are zero, so one has to take that into account.

Q:  How do you decide what is value and what is an undervalued company? Do you always look at historical valuations?

A: That's one of the things I look at, but I also look at valuation in absolute terms and relative to the country. For example, within the context of Japan, Toyota doesn't look very expensive, but relative to GM, it looks quite expensive. So where does the truth lie? I actually think that Toyota is reasonable value because a lot of the stock is owned in Japan and it's working off of that market base. In addition, it's a much better positioned company than GM and that's another reason for the valuation to be richer.

Q:  How do you implement that philosophy into an investment process or strategy?

A: We're looking for inexpensive companies with prospects of improving earnings growth, so we want some catalyst for the valuation to be realized. Our stock selection process is mainly bottom- up, but I believe that one also has to look at top-down effects.

Energy, for example, has been a big theme for the fund. Energy stocks looked very attractive a couple of years ago on many different metrics, including P/E ratios, dividend yields, book value, or just the inherent value of the assets. Oil was trading in the teens of dollars per barrel, so we asked ourselves if oil really was going to go down in value. All of these companies looked attractive from the bottom-up, so we're buying them for that reason, but from the top-down perspective oil looked relatively low-priced. China is growing, India is growing, and the U.S. increases its demand for oil every year. Supply, at the same time, is becoming constrained. When we see a trend both from the bottom- up and the top-down sides, that's when I like to take a sector bet.

Q:  When you take a sector view, do you try to spread it out geographically?

A: It depends on where the stock opportunities are. In the case of energy, there was some spread. Most of it was in Europe because a lot of the large integrated companies are there, like Total and Statoil, but we also had a decent position in Petrobras, a Brazilian company. We did well in an Australian company called Oil Search and in Japan with Inpex.

Q:  Australia actually works as a good back-door way to the rising growth in China with the mineral, mining, and agricultural companies. Is that correct?

A: Absolutely. People tend to miss the fact that Australia is a much safer way to invest in China's growth from an investor protection standpoint. The market in Australia is developed; the legal system is mature and efficient; the companies are well governed and well run. Of course, there is still risk in terms of volatility and stock performance, but the risk of poor corporate governance, accounting fraud, or operational issues is more limited.

Australia has been a point of emphasis for the fund over the last few years, so I'm glad that you brought it up. An example would be Downer EDI, an engineering and infrastructure servicing company in Australia. They'll help a company like BHP or Rio set up a new mine by doing the engineering, as well as doing maintenance and servicing. That stock has done well for us, but it doesn't have a direct link to China. When BHP and Rio suffer a downturn, Downer is probably going to have a downturn as well, but maybe not as much.

Q:  What is your approach to researching stocks and companies all over the world?