10 Questions With Legg Mason Focus Trust's Robert Hagstrom

6. Another big holding for you is Microsoft. What do you think about its decision to forego dividends and the legal challenges it faces?

I don't think I have anything intelligent to say about the legal landscape regarding Microsoft(MSFT Quote). (Laughs.)

Microsoft is a pretty dominant business, obviously. Regarding the dividend issue: To me, their $30 billion cash hoard is an insurance hedge against competition. They can put together a portfolio of "call options" -- acquisitions, new business initiatives. Holding the cash is a way to ensure that if the landscape changes, they can put that cash to work to remain dominant and survive in that landscape. Microsoft is a company that wants to dominate your desktop at work and home --control all entertainment and household functions as well as office functions.

The stock has been a great performer. When you strip out the cash and their equity investments, Microsoft has had a 200% return on investment capital -- that is just astonishing.

The stock should be valued at $65 of $70, so the gap is narrowing. As it works back into the mid-$50s, it's probably only undervalued by about 15%. [The stock closed Friday at $55.10.]

7. Two other new holdings in your fund are Liberty Media and USA Interactive. What do you like about these two companies?

First off, Liberty Media(L Quote) Chairman John Malone and USA Interactive(USAI Quote) Chairman and CEO Barry Diller are phenomenal managers. They are two of the most forward-looking and shareholder-friendly guys you want to be associated with.

I am also a very big believer that an area of high-returning assets are the Internet-content players. There are tremendous global opportunities here, triple-digit return on invested capital possibilities.

USA Interactive is a very good business. It's a bit complex, but Diller has done a great job positioning the company.

Malone's company, on the other hand, is probably one of the simplest businesses to examine. Based on our evaluations, Liberty Media's stock is 50% undervalued -- it's probably worth $15, it's now at about $9. [It closed Friday at $8.82.]

How do you factor in a company's management into your valuation?

Management is a weighting or tipping-point issue for us after we determine the company's value. In a case like Tyco, even though we had new management, the margin of safety with that stock became huge.

In cases where you have extraordinary management -- shareholder-friendly, honest and smart leaders -- you are willing to accept a smaller margin of safety. A 25% discount to value is acceptable when you have great managers like Malone and Diller.

We always look for great managers, but oftentimes the market has found them as well.