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TWST: Tell us about Roxbury Capital Management and what you do there.
Mr. Kahn: We're an investment counselor based in Santa Monica, California. We are a growth-based firm with multi-products, the principal one being a large cap growth strategy. We also run a small to mid-cap growth strategy. We also have a group that started with us two years ago that runs a small cap growth strategy out of Portland, Oregon. A common theme that cuts across all the portfolios is an orientation toward owning high-quality companies. And rather than using that label haphazardly, we have a series of quantitative screens that identify target companies based upon some specific, measurable criteria. In particular, we believe high-quality companies, by definition, generate high incremental cash returns on capital invested in their business. It's a fairly simple calculation that we call return on invested capital. We are measuring operating cash flow as a percentage of the cumulative capital invested in the company, including things like past write-offs or operating leases that are capital investments but don't show up in typical income statement analyses. Ultimately, we are trying to identify those companies that are violating the laws of microeconomics. That is, they're generating outsized or abnormal returns on the capital invested in their business when competitive pressures would suggest this shouldn't be possible, at least over the long term. It is important to note that our work is done on a cash on cash basis. So we're removing some of the idiosyncrasies and/or potential for manipulation that GAAP accounting allows.

TWST: What's the environment like for growth stocks, and in particular the large caps?
Mr. Kahn: The profit environment is nothing short of spectacular. Not only are the published operating or EPS numbers very good, growing north of 20% on average, but the quality ' and I don't think this has gotten enough validation in the press ' of the reported earnings numbers much improved over where it was the last couple of years. In other words, we are seeing fewer restructuring charges and write-offs that distorted earnings during the bubble. The big questions, I think, for investors are: 'Is all the good news out? Is the genie out of the bottle? Has the market already discounted this huge profit improvement?' Our short answer is no, particularly for large cap growth companies which have lagged other asset classes over the past four years. While the dramatic bounce off the bottom is obviously behind us, we do think the profit environment continues to be fairly strong through the end of the year and into 2005. The rate of change slows dramatically but remains attractive ' in the high teens in the back half of this year and in the high single digits next year. And there still is some margin leverage opportunity, we believe, through production efficiencies, better sourcing of supplies and good old fashioned fixed capital leverage. However, companies have been focusing on costs since 2001, and many of the opportunities for operating leverage are starting to slow. As we look forward, top-line growth will approximate nominal GDP growth, which we estimate to be about 6%, and the operating leverage the companies will be able to deliver will get earnings growth in the 8% range. This is the kind of environment where high-quality companies, especially ones with attractive secular growth, can really shine. The global recovery is maturing, so many of the economic turnaround stories have been played. As I said, margin improvement will be tougher to come by. That suggests that sales growth will be the key driver of earnings growth. This kind of environment, at least historically, has favored growth companies with the pricing power and secular growth opportunities to drive double-digit earnings growth. The companies that we currently own, for example, are forecast 13%-14% earnings growth for 2005. We suspect that will turn out to be almost twice the rate of the average company in the S&P 500.