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   Interview

    Guest Interview:

   Biondo Investment Advisors

    540 Routes 6 & 209
    Milford,PA 18337

    Telephone: 1-570-296-5525
    Fax: 1-570-296-5527
    E-mail: team@thebiondogroup.com

 

    Interview Quarter: 4Q2006

 Joseph Biondo, Jr.

 Senior Portfolio Manager

  Joseph, please give us an overview of your company?  
  Biondo Investment Advisors is a Registered Investment Advisor located in Milford, PA with approximately $450 million under management. The core of our business is creating and managing separate account portfolios for our clients. We also advise The Biondo Growth Fund, a mutual fund that was launched in May of 2006. Our business operates in two segments – Private Client Group and Institutional Advisory Group.

Private Clients are those that have a direct relationship with our firm, whereas Institutional Advisory Clients are introduced to our services through an Advisor. In both segments, the clients we serve are primarily Institutions, Endowments, Foundations and High Net-Worth Individuals.

 
  What makes your firm different from other investment management firms with a similar offering?  
  I believe that our firm’s culture is our most identifiable characteristic. We have worked hard to create what we call a culture of “commitment”, which takes into account our clients, the consultants who employ our services, our employees and their families, our community and our industry.

At the core of our business, we have focused on our research process and our investment discipline. By doing so, we have established a solid track-record. Beyond that, we have always maintained that putting the best interests of our clients first has fostered lasting relationships, which has helped our business to grow.

Since we are an emerging firm and are relatively unknown, we help many Advisors enhance their own value proposition by introducing a manager with a superior track record than other, more well-known managers. This helps the Advisor distinguish themselves from their competitors, who typically only showcase the well-known managers.

 
  Can you offer an overview of the different strategies that you manage?  
  For our Private Client Group, we offer three different strategies: All-Cap Growth, Moderate Growth and Growth & Income. The basic difference between the strategies is the level of risk we will assume. All-Cap Growth is offered as an all-equity portfolio or with a fixed-income component as well. Moderate Growth and Growth & Income are only offered as balanced strategies.

The only strategy that we currently offer to our Institutional Advisory Clients is All-Cap Growth and it is only available as an all-equity portfolio. We have found this to make a great deal of sense, since the Advisor is typically allocating the overall portfolio and we are managing just a portion of that overall portfolio.

 
  Can you give us more detail on your All-Cap Growth Strategy?  
  All-Cap Growth is the flagship strategy at our firm. Essentially, it is growth-oriented and includes companies across the entire capitalization spectrum priced at what we deem to be reasonable. We have been managing to this strategy since 1991 and attribute its success to the flexibility that allows us to follow our research process and find the best companies, regardless of size, at the best price.

There are some basic portfolio construction disciplines that we employ in this strategy. We will never own more than 40 companies in the portfolio, which makes us more concentrated than a typical manager. We have position limits both at cost and with appreciation that we follow, so that no individual company represents too much of the portfolio. We limit our exposure to any individual sector and to any market-cap segment as well. These rules allow us the flexibility to go where our process takes us while at the same time removes the possibility of getting too carried away with any particular company, sector or market-cap segment.

 
  Do you have plans for additional offerings to the Institutional Advisory Group?  
  That will be dictated by our clients and the marketplace. Our marketing group has found an increased interest in our ability to be flexible, but style-box investing continues to dominate the landscape. Most Advisors who employ active managers understand that finding managers that are able to consistently outperform over the long-term are a rare breed, so we are having success despite the ability to fit this strategy into one box.

We do believe that All-Cap Growth has a limit in terms of assets. While we are not certain where that ceiling is, we have every intention on closing the strategy at some point in order to preserve the qualities that have led to its success. In the short-run that may limit our company’s growth, but that is not our focus.

We have developed a research process that is repeatable and has been proven to uncover opportunities with companies of all sizes. I am confident that if we were to launch a large-cap growth portfolio, for example, that we would be successful. No matter what transpires, our focus remains on our process and believe that as long as that is true, our business will take care of itself.

 
  What is GARP and how do you use it to determine how you invest your clients’ money?  
  GARP is growth at a reasonable price. Of course, each of us can have very different interpretations of what is “reasonable”.

We believe that in the long run, prices are driven by supply and demand. Demand is primarily driven over the long-term by growth in a company’s earnings. So we focus on companies in businesses that can grow their earnings at an above average pace and generate cash to return to shareholders either through dividends or by diminishing supply in the form of share buybacks. We try not to overpay for such companies because great companies can make poor investments if you pay too much for them.

This attention to valuation has been the hallmark of our ability to outperform our benchmark over time. In the bear market of 2000-2002, our valuation process helped us to avoid many poor investments. It has been our experience that avoiding major losses is paramount to having a track record of out-performance.

 
  How do you allocate your investments in different industry sectors?  
 

We spend the majority of our time analyzing different businesses in many different industries. While our research process often yields a diverse group of companies across many sectors, our valuation work is ultimately driving which companies end up in the portfolios. We have certain portfolio construction disciplines that limit our exposure in any one sector, but the process usually ensures that we have a broad representation across industries.

 
  Do these allocations change with market conditions?  
  To the extent that market conditions affect valuations, yes. Again, our valuation process not only dictates what we are willing to pay for a potential investment, but at what price we may be willing to trim or sell a position. When valuations get to the extremes, it will most certainly change our sector weightings.

This is also true with market-cap weightings. Our process will also dictate where we fall in terms of size – at times we may be more weighted to small, mid or large companies and that is driven by valuation. We currently are leaning more toward large companies because that is where we are finding the most attractive valuations. This is very different than where we were four or five years ago.

 
  In a nutshell, how do you define “value” in regards to an optimum investment?  
  We define value in an optimum investment to be very little downside with a great deal of potential upside. That is typically found in companies with above-average growth potential and below-average valuation.  
  To what degree would you describe yourself as contrarians?  
  In the traditional sense, I wouldn’t consider myself a contrarian at all. By definition, a contrarian should do the exact opposite of what the crowd is doing.

While I strongly believe that the crowd is usually wrong, that doesn’t always mean that the right approach is to take the exact opposite side of the debate. Many times, the crowd is wrong in magnitude and not direction. Let me offer an example:

In 2007, the consensus view is market returns of roughly 7-9%. In my experience, there is about a 65% chance that this view will be wrong. If I were a textbook contrarian, I would bet against higher prices, leaving me in cash or even short.

However, the crowd being wrong doesn’t necessarily mean that returns will be negative. If the markets advance 15-20%, the consensus view is still wrong. If I were to take the exact opposite position, I would be more wrong than the crowd, which in this business does nothing for career longevity.

All of this said, there are times when it pays to go exactly opposite the crowd, which we have done, but that does not make me a contrarian.

 
  What measures do you take to mitigate risk in your portfolios?  
  Primarily, I believe our best defense is our research process. In All-Cap Growth, the diversification across companies of different sizes has helped limit risk. Sector diversification is another important tool, which is driven by our portfolio construction disciplines. Finally, our valuation process plays an important role in risk-management.  
  How do you distinguish between a company whose stock is undervalued and one that has ongoing problems?  
  We spend a great deal of time and energy making the distinction between broken stocks and broken companies.

A broken stock is when a stock has come down in price, for a multitude of reasons, but which we believe to be temporary in nature. These situations often yield undervalued securities. A broken company, on the other hand, may have come down in price, but the reasons may not be temporary. There are times when industry dynamics change, companies don’t see, prepare or react to such change, and the result is often an overvalued security even though it may appear cheap.

We obviously like to invest in broken stocks when we see a potential catalyst, while avoiding broken companies.

 
  How do you define a company with a “great franchise”?  
  We consider companies that develop ways to insulate themselves from competitive pressures as great franchises. This can come in a variety of forms, such as patent protection, distribution networks and new product development. The common thread in great franchises across all industries is excellent management.  
  To what degree is the investment approach an art versus a science?  
  At our firm, there is a combination of both art and science to managing money. Our research process is designed scientifically, but our decision-making is more artistic.

We have three stages to our process: idea generation, qualitative analysis and valuation. This has been designed to be repeatable, but not easily replicated. The first step is a system we have developed to ensure we are constantly evaluating new ideas, which I would consider science. The next step involves conducting qualitative analysis, which I would consider art. The final step is figuring out what we are willing to pay for a specific security, which combines elements of both.

If you asked which element is more important, I would have to say art. Without the science, though, there would be a blank canvas.

 
  Would you say you are bottom up or top down investors?  
  Again, there are elements of both. While our security selection process is bottom up, we overlay a top down approach for macro or sector themes that we may wish to incorporate. The particular companies that we own will go through our process, so we are primarily bottom up in those terms.  
  Do you use any macro economic theory in trying to determine where the overall market might be heading?  
  An understanding of macro theory is important, but not for the reason you mentioned. We really don’t spend a great deal of time trying to figure out where the overall markets are going because we invest in companies. In order to determine where we think the overall market is heading, we rely more on behavioral economics.

There needs to be an awareness of location in the economic cycle, but that is for determining what types of companies might make sense given our economic outlook. Our strength has been our focus at the company level and that is where we spend the majority of our time and energy.

 
  How many companies do you track overall and how many issues end up in your typical portfolio?  
  In All-Cap Growth, we begin the process with every available public security that trades on a US exchange. In the initial phase of our process, that usually is distilled down to approximately 250 companies that we analyze qualitatively during the course of a year.
The result is typically 75-100 companies on our active watch list and our portfolios will have no more than 40 securities.
 
  Are you always invested or do you ever raise cash to protect from bear markets?  
  There are times when we trim or eliminate positions because of valuation and we are not able to find attractively priced alternatives. In such situations, we will hold cash.

There is an important distinction to make between holding cash and protecting from bear markets. Our valuation process drives our overall asset allocation. If we cannot find attractively priced securities, there will be cash in the portfolio. This worked well for us in the bear market of 2000-2002 when we were able to significantly outperform over that period. It was our process that drove that, not our guess of an impending bear market.

All of that said, some of our institutional clients have specific criteria as to the amount of cash we are able to hold at any time, which puts the asset allocation in their hands. In such circumstances, we try to communicate with those clients to allow for more flexibility. If they are too rigid, it may mean that they allocate our cash elsewhere and to other managers. We will not be invested just for the sake of being invested. If we can’t find attractively priced investments, we won’t make them.

 
  How do you go about doing your research?  
  As I mentioned before, we have three parts to our research process: idea generation, qualitative analysis and valuation.

The first step is necessary because there are approximately 15-16,000 publicly traded companies that trade on the US exchanges. We have developed a proprietary, quantitative system that allows us to narrow our focus on a smaller number of companies on a regular basis.

Next, we conduct our qualitative analysis, and we try to answer three questions:

1. Is this a business that we want to be in?
2. Do we like this company’s position within their industry?
3. Are the right people running the company?

There are a number of factors that go into answering these questions, which would require much more of your time to drill down on. We fundamentally believe that by taking an ownership approach to the business, a thorough analysis of management is required. I don’t know anyone who would go into business with someone they didn’t think very highly of or trust. So that is the approach we take.

The final step is our valuation process, which I mentioned earlier. This determines whether a specific company ends up in the portfolios or on our watch list. We have prices that we are willing to pay for specific securities and prices at which we would be willing to sell these companies. It is vital to our success to stay disciplined to these parameters.

 
  What are some of the factors you look at when trying to answer these questions?  
  First and foremost, we have to like a company’s growth prospects. We want to find companies that can grow their revenues and earnings into the future at an above-average rate in comparison to their industry and to companies in general. We like to find companies that compete in industries with high barriers to entry, which usually gives them pricing power. We look for companies that invest heavily in research and development, that have a focus on new product introduction or product extensions. We like companies with disposable products and recurring revenue business models. We typically want to see a track record of management’s ability to manage growth and we look for management that is focused on creating long-term shareholder value. We also want to see management with the right incentives and companies that are structured properly.  
  What is your typical holding period?  
  Our annual portfolio turnover has been about 20%, which translates into an average holding period of about five years. We enter each investment with a long-term horizon, but understand the need to be flexible. If a company we own is delivering on our expectations and remains attractively valued, we will remain owners.  
  Can you discuss your sell discipline?  
  There are five triggers in our sell discipline: quantitative deterioration, qualitative breakdown, valuation, violation of portfolio construction discipline and identification of a superior alternative.

Most commonly, a slowdown in earnings that we do not see as temporary or do not see a catalyst on the horizon will cause us to exit a position. If management changes or industry dynamics change, we may sell. If the valuation becomes too rich, we may trim or sell a position outright. If a company or a sector grows too large, we may be required to trim or sell. Finally, since we will not own more than 40 companies at any time, we may have to sell because we have uncovered a new opportunity and need to make room in the portfolio.

 
  Discuss the reasons behind the launch of your Mutual Fund?  
  When we decided to launch the mutual fund, we thought it would be an attractive alternative for our Private Client Group. The fund largely reflects our All-Cap Growth Strategy and allows clients to participate in our process at a reasonable cost when a separate account may not be appropriate. We have since discovered that the fund is also a great supplement to our Institutional Advisory Group offering since it allows Advisors access for their clients at all account levels.  
  Please direct us to where an investor might get more information on Biondo Investment Advisors.  
  Investors looking for more information should contact Jason Wyatt, Director of Institutional Sales, or Greg Lutfy, Managing Director, at (877) BIONDOS (246-6367), email us at team@thebiondogroup.com., or visit our website www.thebiondogroup.com.  
     
 
 
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