Host: Please welcome Robert Sullivan, portfolio manager of the Satuit Capital Micro Cap Fund with Satuit Capital Management Trust (SCMT). For more information, visit www.satuitcapital.com.

Robert Sullivan: Thank you for having me. It's a very interesting time in the market place, and probably one of those few times in a market cycle where things have certainly changed enough that as investors, we need to take another look at our portfolios and maybe do some reallocation to some areas where we might have been underweighted in the past, especially in the small- and micro-cap strategies.

The Chat

Question: How do you go about finding the companies that you select for your Micro Cap Fund?
It's a two-staged process. Let me start with the investment philosophy, which is that we feel companies that have a reasonable multiple that have an above average earnings per share (EPS) growth rate will over time outperform the broad market. That's a philosophy. The investment process is a two-step process. Step one, which is 10 percent of the process, is a quantitative screen that we run using Zacks, and we look for companies that have higher returns on equity on a valuation side, higher returns on capital, higher returns on assets, attractive price-to-book (P/B), attractive price-to-sales (P/S), and attractive price-to-earnings (P/E). Then on the growth side, we look for companies that have EPS share growth that consistently beat consensus numbers, have their earnings estimates consistently increasing over time, and increasing looking forward. That's step one of the process. Step two, or the other 90 percent, is just simply fundamental analysis. We try to identify a company's revenue growth driver, margin expansion possibilities, balance sheet strength, and cash flow. That's our mantra. When we find companies that fit those criteria, those are companies that go into the fund.

Question: Do you have a Web site?
Yes, it's www.satuitcapital.com.

Question: Are there sites online that you use that you find extremely helpful in the course of your work?
Yes, actually. One is certainly the SECEDGAR site, and it has terrific historical financial data. I find that hoovers.com is very useful for a quick overview of what a company does, and any company that we look at, one of the very first places I'll go to is the company Web site. An investor can get a lot of information simply off the customer's Web site in terms of product, management, and geographical diversification.

Question: What are some of the names of your heaviest weightings in your fund?
One interesting name that we've held for a while is a company called Action Performance (ACTN). They are a leader in design, marketing, and distribution of motor sports merchandise. The most recognizable product might be the diecast collectible scale models of NASCAR boat racing. Action Performance sells products via the television, Web, and track side. It's a great story, as NASCAR is the fastest growing spectator sport in America. A 17 multiple on 02 number is a tad bit rich; however, we're real confident in that 40 percent growth in EPS, and feel that that may be a bit conservative.

Question: Do the companies that you hold in this fund tend to be leaning towards any particular sector/sectors, or is this something that you would intentionally try to avoid?
Terrific question. We tend to stay sector agnostic. The investment process drives the sector weightings. While we don't ignore the bigger picture sector dynamics, we still try to focus on those companies that meet that criterion of good fundamentals. Currently our top sector holding is capital goods-technology, and that sector weighting is approximately 18 percent versus a 22 percent for the Russell 2000.

Question: Are there any types of companies that you would definitely want to stay away from, like biotech or tech companies?
We tend to focus first on companies that have positive and growing EPS. There are enough of those companies out there that are underfollowed, that we feel that that's the place where we start to look for first. In terms of companies that we would want to avoid, we would avoid companies with declining earnings expectations, a contracting margin story, a company we could not identify a revenue driver for, or a company that has a difficult cash flow position. Our process and philosophy is very much fundamentally driven.

Question: Do you limit yourself as to what percentages of any one company you will hold in your fund and if so, what is this percentage and why?
(Laughing) The fund is small enough right now that we don't have to worry about that. Hopefully, in the real near future we'll have to worry about that, but seriously, we begin each portfolio position at a 1 percent position of the portfolio. We don't ever anticipate being any more than 3 percent of the total outstanding market cap of any one company. Our universe of stocks that we choose from is $500 million of market cap or less. We will close the fund at $250 million of contributed capital. The median market cap of the companies in the portfolio is $214 million. My point is that we have made the fund flexible enough in terms of market cap and where we will close the fund, that we don't run into ownership issues until we have close to $1 billion of assets in the fund.

Question: Isn't there significantly more risk involved with smaller micro-cap companies that could very well fail or take many years to become profitable?
I guess we could look at Enron (ENRNQ), Corning (GLW), etc., and attach the same risk parameters. Historically, there is somewhat more risk involved with micro-cap stocks. However, investors over the long haul on an annualized basis are compensated for that risk to the measure of 150 to 200 basis-points per year of excess annualized return. That excess annualized return more than offsets the risk as measured in standard deviation. Also, the questioner brings up a very, very important aspect of micro-cap investing, and that is, it should not be 100 percent of an equity allocation. It is a piece of a well-diversified equity portfolio, and I'll repeat, a well-diversified equity portfolio.

Question: How long do you anticipate holding onto a company in your fund before reevaluating it?
We reevaluate companies when they become 2 percent of the portfolio value. At that point we will look to be sure that we want it to be that much. We tend to have an internal 2 percent trim rule where we "take some off the table" and use the proceeds to go on to try to find the next winner. We will also sell a stock if we feel that something has happened to change the dynamics or the reasons why we own the stock in the first place. That could be a change in the revenue outlook, the margin expansion, or EPS projections of a company.

Question: What types of fees are associated with your fund, and what has your rate of return been on this fund since inception?
The inception date of the fund was December 12, 2000. As of December 31, 2001, the inception return was +39 percent. The 2001-year return as of December 31, 2001 was a +38.16 percent, ranking it in the top 1 percent of all U.S. domestic equity funds. Currently the expense ratio is 2.8 percent, 150 basis-points is the management fee, and 130 basis-points is considered other fund expenses.

Question: Can you please give us the names of some of the other companies in this fund?
Another company that we like is called Offshore Logistics (OLOG). Offshore Logistics operates a fleet of helicopters that service oil and gas companies. The near-term outlook is rather soft, but mid to long term, we feel there are a lot of positive catalysts. As the economy strengthens, we feel more drilling activity will occur. We also feel over the long term we will see a new focus on domestic energy exploration and production. This plays nicely into Offshore Logistics' business, which is ferrying people and supplies to the oil and gas industry. Another company that I could mention would be Overland Data (OVRL), which provides data storage solutions for computer networks. Because of the Web, both individuals and corporations are storing more information for future retrieval. Overland Data preannounced January 2 that revenue and EPS would exceed analyst expectations of $42 million and 13 cents per share, respectively. They reported several days ago 18 cents per share, which was 5 cents better than the consensus, and $45.6 million in revenue, which was $3 million better than revenue expectations. The upside came from new products, which helped the top line and better buying practices, which helped profitability.

Closing Remarks

Host: Thank you for joining us today, Robert! We appreciate your insights!
Thank you for having me. If anyone wants to contact us directly at Satuit Capital Management Trust, you can contact me at 781-545-7408 or Jeff MacCune at 781-545-7409.

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Thanks to DeniseLVD for hosting this chat.

First Editor:  MultexCola
Final Editor: Carewls

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