Morningstar Advisor - Summer 2008 - 51

Robert Gensler: The strategy’s portfolio construction is probably what’s more different. I would say the research process is not that different, because this strategy was created to be a cherry-picking strategy of best ideas across the platform. We’re blessed because it’s a global strategy, so you can say, “Look, we’ve got this great domain expertise in broad regions—the U.S., Europe, Japan, emerging markets—and in the sectors—health care, financials, tech, etc.”—and this strategy gets to cherry-pick the best ideas off of others. Also, it’s a relatively concentrated strategy, and that might be what you’re saying is slightly different from other T. Rowe funds. We’re running about 79 names as we speak. I feel strongly that there should always be less than 100 names in the strategy and maybe closer to 60. I call it “moderately concentrated.” Many of the T. Rowe strategies are at 120 or 150 names, so it’s different. It’s higher predicted tracking error, higher active risk than many of the strategies. KK: Also higher turnover. RG: Yes, but a higher turnover is highly con- just how good you buy a stock. It’s how good you sell a stock and the negative alpha you can avoid. If you think of the sell discipline as a critical part of the investment process, it leads to higher turnover. Maybe it’s because I grew up in my career on a trading desk at Salomon Brothers that I learned that it’s not just how much you make on the things you own; it’s also how much you avoid losing. KK: What are the key attributes of your sell discipline? RG: Every day I walk in and I look at what we own, and I ask, “If I didn’t already own it, would I buy it today at this price and at the same position size?” If the answer isn’t yes to both, then I have to sell. There’s an old trader’s line: You’re either buying or hoping. Which one is it? You’re either willing to buy that stock, fresh money today, or you must just be hoping it’s going to trade up. I live by that, and it’s critical. There are many names that we sell just because I look and say, “You know, if I didn’t already own it, I would not buy this today.” So we sell and move on. KK: If I’m a T. Rowe analyst and want to bring you ideas, how might my approach differ with you than with other T. Rowe managers? RG: I’ll tell you what’s the same first, and then I’ll tell you what’s different. sistent with owning fewer names and higher tracking error, higher active risk. Because when one takes higher active risk and has fewer names, with a concept called “sweating the equity,” there’s only 100% in the strategy, and every basis point matters. There are days when this stock is up and now it’s a little bit pricier, and this one’s down, so we rebalance, or here’s a new name that’s better, and jeez, every time we buy something, by definition we have to sell. That’s sweating the equity, and it leads to higher turnover. Also, we try to drive this thing hard for a lot of excess performance. We tell clients that we’re trying to get at least 400 basis points of excess performance per year. On a personal level, I’m shooting for a lot more than that, quite frankly. It doesn’t mean you can always succeed at that, but a lot of excess performance comes from avoiding mistakes. It’s not There’s another discipline about owning stocks. What if you’re trying to figure out whether to buy a name, but you look at the chart and the price is moving straight up. “Ooh, that’s scary.” I ask myself, “If I already owned it, would I keep it? Would I even be trimming? Would I just be bragging that it had gone up or would I be selling?” If the answer is “I’d keep it, and I wouldn’t even trim,” then I just go buy it. Let’s get the ego out of the equation. The third thing that is important to the portfolio construction is that with every name we own I say to myself, “If it trades down, am I likely to buy more?” If that answer isn’t yes, I shouldn’t have bought it in the first place. If it trades down and I’m likely to sell—this is a hard way to make money. I’m going to sell it lower predictively. I’m old-fashioned. I like to buy low and sell high. So I want to go into a situation saying, “If it trades down, I’m a likely buyer.” What’s similar is that across the T. Rowe Price platform, we try to source alpha in a very consistent way—with some nuance that’s different per manager, geography, charter, etc. But what’s consistent is this: If you think of why stocks go up or down, it’s really simple. It’s how does the business evolve—good and bad—and how does that map to numbers— income statement, cash flow, balance sheet. Pretty simple stuff. You could call that qualitative and quantitative. What’s pervasive at T. Rowe Price, be it a value or growth investor, is that you’re trying to predict that evolution. A value manager might say, “I want to predict whether the company can stay in existence, and I’m buying it really cheap and with a mean reversion of valuation.” As a growth-oriented manager, which is more my style, I’m trying to predict the durability of the growth and say, “Well, is the valuation reasonable enough?” I tilt the valuation versus growth and durability. What might be different is that I have the ability to go anywhere and do anything, and I don’t have to own every name. I disagree with analysts more often than other portfolio managers do. We have close to 100 analysts now, so there’s a lot of them telling me—I call them the “you oughttas in life”—you ought to own this, you ought to own that. Sorry. I don’t have to own it. Another difference is that there might be a great technology company in Japan, which is good for our Japan manager to own in a Japanese construct, but I might say that it doesn’t fit the construct of the global strategy because there’s a better company to own somewhere else. Sometimes, analysts find that frustrating. KK: Running a global strategy, you are looking everywhere for ideas. How do you avoid suffering from information overload? MorningstarAdvisor.com 51

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Morningstar Advisor - Summer 2008

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