Equity Exposure

{Q} SO Are you sitting tight?

{HEMBRE} We have actually made a couple changes in the last few months. In early January, when the Standard & Poor’s 500 Index hit 1,310, we bought into that. We raised our equity allocation by 4 or 5 percentage points. Then early in February, we trim-med back on that position, and it just happened to be fortunate timing.

{Q} Why did you do that?

{HEMBRE} What’s really been guiding us is our expectation that earnings are in a period of contraction. The Fed cutting interest rates certainly improves the outlook for 2009, but to the extent that that’s driving market rallies today, we think it’s too soon for it to improve underlying company fundamentals.

When we see the Fed bringing real interest rates [Fed rates minus inflation rate] territory to zero or negative, improvements in business confidence, and a bottoming in the housing market, we’ll be more comfortable taking on greater equity exposure.

{Q} Is your fund positioned for a recession? how long do you think a recession could last?

{HEMBRE} Yes, it is. And we don’t know how long it’s going to be, but we are going to be looking to specific signposts to tell us
that we’ve hit a bottom. We don’t see that today, so we continue to be defensively positioned for a recession.
 
{Q} Are you making any bets on Minnesota stocks?

{CHALUPNIK} We own Ecolab, Inc. [NYSE: ECL], a very consistent business. We own a lot of Medtronic, Inc. [NYSE: MDT], some St. Jude Medical, Inc. [NYSE: STJ], and Target Corporation [NYSE: TGT] on the retail side. Target has been beaten up pretty bad, so we think there’s value there.

{Q} What about commodities?

{HEMBRE} We actually just took our commodity allocation down in response to the run-up in prices.