Q:  Would you provide an overview of the Touchstone High Yield Fund? A : Touchstone Investments is a mutual fund company that provides access to well-known and respected institutional asset managers through extensive sub-advisory relationships. The Touchstone High Yield Fund is sub-advised by Fort Washington Investment Advisors, Inc, and I lead a team of analysts that manage the Fund. Q:  What are the key advantages of investing in high yield bonds? A : We believe that high yield is an asset class with solid risk-adjusted returns and upside-downside tradeoff. Generally speaking, this class provides income and consistent returns on an efficient basis with a lot of downside protection. In the current market environment, high yield bonds appear to be very appealing. The fundamental backdrop for the high yield market looks appealing with default rates projected to remain at very low levels. Additionally, high yield spreads to treasury bonds are above historical long-term averages. We have a moderately expanding economy and, more importantly, a rather low default rate, below 2% with a default forecast expected to remain low. We see that as a nice value proposition for high yield. With yields and rates at their current levels, we feel that it is going to be very difficult for core fixed income funds that invested in U.S. Treasuries to generate attractive returns because of a lack of yield and the potential for higher interest rates. When comparing high yield to equities, the latter prove to be better returning assets in the longer term. But in the current environment where we have low economic growth with limited upside, we think that high yield can deliver most of the returns that equities can but without a lot of the volatility. Q:  What is your investment process? A : There are actually two parts in our process. The first few steps are top-down, risk control evaluation steps and the final step is the credit selection step, which is bottom-up. Starting with the top-down steps, we initiate the process with a sector bias that is always in place. There are a variety of sectors that we think are appropriate to be managed with leveraged capital structures because of the stability and predictability of cash flows and revenues. Oftentimes, these are sectors that are less cyclical, or more hard-asset in nature. Such examples might include sectors like energy, utilities, healthcare, and others. As a rule, we tend to be overweight in these sectors. There are also a variety of sectors that we consider inappropriate in the high yield market because they are very difficult to manage with leveraged capital structures. They are often characterized by cyclicality, volatility, and have limited asset protection, such as technology, gaming, banking and financials and other cyclical sectors. We tend to be underweight in such sectors as part of our risk control strategy at the portfolio level. Another component of the top-down portion is a macroeconomic step where we may lean the portfolio in one direction or another based upon our macroeconomic outlook. All of our portfolios are constructed with an orientation to hold securities for a long-term and across a full business cycle. The final step in the top-down part of the process is the structural avoidance step in which there are a variety of securities that we avoid from a structural standpoint. We focus on the BB and B rated securities in the market because we believe BBs have delivered the best risk-adjusted returns, whereas lower quality bonds rated CCCs have risk-adjusted returns that we believe are inadequate. Moreover, we do not think we are compensated for the additional risks that occur in the CCC rated segment of the market and therefore do not purchase CCC rated securities. We also de-emphasize the zero-coupon bonds primarily because they tend to be issued by companies that do not generate free cash flow. In our view, generation of free cash flow is critical in high yield. We focus on the higher quality part of the market because that is where the best risk-return tradeoff exists, and that is the best way to manage high yield bond portfolio. The first three steps in the first part assist in reducing downside volatility significantly in times of stress. The final part is the credit selection when our team of analysts conducts a deep dive into a particular credit. Our team is very experienced and is a key attribute of our high yield strategy. The team starts with the industry analysis. We search for industries that have favorable cash flow characteristics that are more stable and predictable. Once we get there, we like to assess the competitive advantages among industry participants. We want to make sure that the industry will continue to grow, that there are no undue competitive forces from the market, and that the industry has the need to exist. Next is the analysis of management. At this stage, we want to get comfortable with a management team’s track record, reputation, and integrity. We want to get a clear idea on the compensation and governance structure of management. This is a very critical and important part of the process. The focus then shifts to the capital and debt structure of a particular company. An important part of the process for us is the assessment of liquidity or the ability to access capital through external means. Ideally, we want companies that have generated liquidity internally and have the ability to access capital through external sources, which means accessing the equity markets, debt markets or the bank loan markets. We are always looking for companies that can survive times of stress with sufficient liquidity throughout such periods. As a next step, we dive into the income statement to determine the ability of a company to generate cash flow. Here, we will focus not only on stability but also the predictability of cash flows. In the end, we evaluate the business and financial metrics in the research report, which is put together by the analyst for sharing with the entire team. The team will then assess and determine if the idea makes sense. At the end of the day, I decide which bond to buy, sell or hold, but do so with considerable deference to our research team. Q:  What sectors appear to be most favorable for high yield bond investing? A : One of the sectors we like is the midstream energy space, a segment of the energy sector that is active in the distribution of oil and natural gas. The midstream energy is a stable, predictable, low risk business, but, more importantly, it is also growing. There are very few industries out there that have the visibility and growth prospects that midstream energy has. We think it is an ideal sector with a very favorable downside-upside tradeoff. The midstream energy space is stable because of the constant need for natural gas and oil in this country. In addition to the constant need for this supply, the most appealing characteristic is that there is limited commodity pricing risk. An example on the other side is technology. Technology in the high yield market is very volatile with all the downside in the world but with very limited upside. In our opinion, that is a very unfair upside/downside tradeoff for a volatile sector like technology. In a space like technology we think you are better off playing either in the equity market, where you have much more upside, or in the high grade bond market, where there are cleaner capital structures and less downside risk. Q:  How do you build your portfolio? A : The portfolio is diversified with about 130 to 140 issuers. We will not exceed a 3% weighting in a B rated bond, or a 4% weighting in a BB rated bond. We tend to have very few names that we hold above 2%. As part of the portfolio construction process, we identify sectors and securities based on their relative value. This is the part of the process where relative value comes into play and the team orientation kicks in before we make our weights decision. While each analyst has a good handle on relative value within his sectors, our team orientation allows us to properly assess relative value both within sectors and across sectors. Again, the value that a stable and experienced research team delivers cannot be overstated here. On average, we like to target a 1% position in a particular issuer and then, based upon the relative value or our confidence in the credit or bond and our appreciation of the value, it will move up or down from that 1%. Our portfolio turnover is very low. The Touchstone High Yield Fund is benchmarked against a variety of indexes like BofA Merrill Lynch High Yield Cash Pay Index or Barclays High Yield Index. We would characterize ourselves as being cognizant of the benchmark, but we are not tied to the benchmark and it is not uncommon for us to be different from the index. Q:  What risks do you focus on and how do you manage them? A : We take into consideration a variety of risks such as risk versus the benchmark and the absolute downside risk. That said, we are primarily concerned with absolute downside risk, which we try to limit as much as we can in the portfolio. Risk control is extremely important in high yield bond investing strictly because risk reward ratios are different from traditional bond or equities investing. Having a limited upside and unlimited downside in the high yield space, it literally takes four or five winners to compensate for one loser. We focus on the higher quality part of the market and avoid the high risk segment of the market that are rated CCC or lower. We also favor certain sectors that we think have favorable upside/downside while avoiding sectors with a lot of downside to reduce portfolio risk considerably. Diversification in the portfolio also helps us avoid being hurt materially by any single name. Lastly, we have a very proactive sell strategy. If we have a security that is not working out, we are quick to get out of that position because of our conviction that the way to outperform in high yield is to limit the downside risk.