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Active ETF Manager on Why He Loves Berkshire, Apple

Wedgewood's David Rolfe is new to mutual funds, but not investing.

Russel Kinnel, 02/04/2011

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David Rolfe is a seasoned investor but a new name to the mutual fund world. At St. Louis-based Wedgewood, Rolfe has helped to manage low-turnover, large-growth portfolios for 18 years. He's built a strong track record there and now runs recently launched RiverPark Wedgewood Fund in that same style. The fund is available in both open-end and exchange-traded fund formats. The ETF is named RP Focused Large Cap Growth RWG.

A low-turnover, large-growth strategy makes sense for an active ETF because there's enough liquidity for managers to finish a trade during the day before they have to post the portfolio at day's end. It does make for an interesting view of an actively managed fund, as you can see in daily portfolios here.

Q. What kind of companies are you looking for?
A. We endeavor to own the best of America. Such companies are best-in-class business franchise--double-digit growers, market-share takers, industry leaders, and cash-flow generating machines.

Q. How important is management?
A. Critical. True growth companies must have passionate, entrepreneurial management at the helm. A true long-term vision--and reinvesting capital for long-term growth--is sacrosanct.

Q. How do you go about assessing management?
A. We must answer the following questions affirmatively: Is management a good steward of shareholder capital? Does management exhibit entrepreneurial tendencies and attributes? Does management manage the business to please Wall Street first or to please patient "owner-shareholders" first? Does management admit mistakes early and forthrightly? Does management provide and communicate enough financial information in order for an investor to make an informed analysis of the company?

Q. How do you manage risk with a portfolio of just 20 stocks?
A. Risk mitigation permeates all elements of our philosophy, process, research, and portfolio management. We reduce company-specific risk by investing in seasoned businesses with the highest-quality balance sheets. We reduce management risk by investing in businesses with seasoned, deep management teams. We reduce macroeconomic risk by relying on management to navigate the economic trade winds of their respective industries. We reduce company-specific valuation risk by adhering to a disciplined, contrarian valuation construct. We reduce portfolio risk by both minimizing company business-model overlap, as well as not allowing any holding to represent more than 10% of our portfolio. We reduce client-portfolio risk by focusing on reducing the permanent loss of capital, rather than short-term quotational loss of capital. We reduce risk by muting the "institutional imperatives" that permeate active investment management: We are independently owned. Our jobs are secure. We have the rare luxury to think, act, and behave in a contrarian manner.

Q. Do you have limits on sector weightings?
A. Maximum 35% broad industry weighting. Maximum narrow industry weighting. Maximum 10% individual stock weighting.

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