Q:  What is the history and objective of the fund? A : The ING Intermediate Bond Fund was launched on December 15, 1998, and the fund is currently managed by Michael Mata, Christine Hurtsellers and Matt Toms. The objective of the fund is to outperform our benchmark and peers by investing in a range of taxable fixed income securities issued by the U.S. government and its agencies, bonds of corporations and emerging markets bonds. When it comes to investing, we have a core plus approach. Q:  Would you elaborate on your core and plus approach and how you go about finding opportunities? A : In the core segment we include the bonds of the U.S. government and its agencies along with investment grade corporate bonds and securitized investments. In addition, we extend the risk profile in the plus segment by looking for opportunities in the emerging markets and in the high yield universe. From the benchmark perspective, the U.S. Treasury makes up approximately 35% of the Barclays Capital US Aggregate Bond Index, the benchmark index for our fund. The second largest component of that benchmark is the agency mortgage-backed securities, which is around 32% weight in the benchmark, with corporate bonds being the third largest segment at 20%, followed by government-related securities, mostly agency bonds, at 11%, and then asset-backed securities with an approximate 2% weight in the index. The core segment would be first and foremost, whereas high yield securities and emerging market bonds will come second in terms of importance. Our third plus sector would be non-dollar denominated bonds, and the fourth would comprise other asset-backed securities. Q:  What beliefs guide your investment philosophy? A : Our goal is to generate superior returns in a risk-controlled manner regardless of the market environment. We constantly look at the changing relationships across multiple alpha sources. While these could be different sectors, the correlations between the sectors and the securities within them will change over time and we try to anticipate those changing correlations by always looking for the best risk-return balance. It is our belief that within the fixed income market the correlations change among various sectors but they are not uncorrelated. In our view, the returns are correlated and they change depending on differences in the global macroeconomic environment. Q:  What is your investment process? A : Our investment process is both top-down and bottom-up oriented in search of the right risk-return balance. We have 100-plus investment professionals who look for best investment opportunities in the fixed income market that align with our view of the global macro environment. The fund is mandated to own 80% investment grade securities at all time, but it can own up to 20% non-investment grade. High yield corporate bonds are a meaningful driver for us, and we will be adjusting our allocation to high-yield bonds appropriately in different environments. Q:  Do you focus on the macroeconomic environment? A : Yes, we do. We absolutely focus on it. Our global macro team is staffed by global economists who help us understand every global development. Additionally, we have portfolio managers who are responsible for understanding our client constraints as well as the world around us. At the next level, we have emerging market sovereign specialists, individual sector specialists, and investment grade corporate bond specialist teams, and each of these teams is charged with understanding their specific sector. What is more, the team heads also come together to share insights about their sector and the global situation. All the teams rely on our global economists as well to help frame the current global environment and look for clues as to where the economy is headed. Finally, all that input is used to frame the three main different types of risks that we deploy in the portfolio. Those three main types of risks would be sector allocation, security selection, and interest rate and curve risk. We list the major sectors of the bond market – the Treasuries, agencies, mortgages, corporates, asset backed securities, CMBS, high yield and emerging market debt – as part of our constant assessment of the relative value between those sectors. Thus, as the relative value and risk-return tradeoffs change, we will change the weight accordingly. For example, in 2011, the yield on the high yield index had moved down to about a 7% level, which looked fully valued to a degree. In an environment with fears doubling about Europe it was a very natural time to reduce our high yield allocation in the early second quarter of 2011 from 10% to around 6% or 7%. That is an example of a situation where we think the market was fully valued and we reduced our allocation. After the selloff in 2011, in the third quarter of 2011 we had one of the most punishing environment in the history of fixed income market that lifted the yield in the high yield index from 7% to above 10%. As a result, we thought that that the sector had became too cheap. We bought back high yield securities in late 2011 to early 2012 and have benefited from a very significant rally in the high yield market. We always have a view on the global macroeconomic environment and our research team helps us in shaping our views. We have a team of analysts that will understand each company and they will not only do the credit research analysis to determine which corporate bonds we like the best but also help portfolio managers to optimize the overall risk budget. Furthermore, our global macro team runs our outlook on interest rates and where we want to be positioned on the curve. We are constantly evaluating if the rate curve is likely to steepen or flatten or the spreads between different sectors are likely to shrink or expand. Q:  Can you illustrate with some examples how you explore opportunities in changing correlations? A : We do not push the belief that there are uncorrelated sources of alpha. Instead, we push the belief that there are changing correlations. For example, we have had a fair amount of volatility in the global financial markets in the last five years. The Commercial Mortgage Backed Securities universe provided a lot of volatility in 2008, when the commercial real estate market seized up and CMBS securities exhibited extreme volatility. In 2008, the correlation of CMBS to global instability or to equity volatility was very high and they exhibited a beta of more than one. In 2011 and 2012, we witnessed a decoupling to a certain degree or a change in the correlation of CMBS to global volatility, and we think it is driven by two factors. First, the performance of U.S. real estate assets which back commercial mortgage backed securities is not directly tied to Europe because the CMBS market is inherently a U.S.-centric market. Also, the Federal Reserve has held rates at very low levels and has actively pushed the longer-dated rates down, so some of the prime beneficiaries of that have been companies that refinance debt at low levels. But an even bigger beneficiary is the commercial real estate market, where they can refinance loans at much lower rates. We believe that commercial mortgage values are being pushed up by the lower interest rate structure. We also think the environment was perfect for the CMBS market because it was not tied to Europe and was going to benefit from a low rate structure. Then its correlations started to change and that market actually exhibited very strong performance and much lower volatility in most of 2011 and through 2012. Q:  How do you build your portfolio? A : Our conviction is that a constant understanding of sectors, securities and the shape of the curve is the key to quality portfolio construction. Within all three buckets we are always looking at concentration risks too, as we seek to build a diversified portfolio. We want to be able to have multiple decisions that are influential for the portfolio as opposed to only one or two decisions defining the portfolio performance. We tend to avoid making one or two big bets and we prefer to have an array of relatively modest size positions in the portfolio. The other major determinant in our portfolio construction process is liquidity, which determines how quickly we can change our positioning, both within a security and a sector. So, when we allocate to different securities or sectors, we are always taking into account how liquid our position is. Should it turn out to be less liquid, we certainly want to be paid more in order to take that risk. Typically, interest rate moves are negatively correlated with the moves in credit spreads. That is why we are always looking at the interaction of those three different risk types - sector, security and interest rate to see if we anticipate changing correlations. Each sector that we invest in is well diversified. At the same time we are not hyper-diversified because we tend to alter our sector weights over time. In our security positioning we need to make sure that we have big enough and tradable liquid positions so that we can change our positioning as global markets change. The average holding size per instrument is well below 1%. While there may be some instances where we will have investments larger than that, those would typically be in more liquid securities like government bonds or mortgage securities that are very liquid and exhibiting lower volatility. Q:  What is your buy-and-sell discipline? A : The decision to buy and sell a security is basically one that happens only after a risk budgeting process is completed. To do that successfully, we implement a risk budget. We make decisions to make investments and when our investment thesis is either proven wrong or played out, we tend to sell a security. Q:  What risks do you focus on and how do you manage them? A : We try to look at risk in as many ways as possible, both in tracking error terms, scenario analysis terms and from a competitive peer standpoint as well. At every level, we have different views on risk and an overarching view at the top of the portfolio what our overall risk is and how it is correlated. One way to manage risk is to actively use more liquid forms of hedges as opposed to always buying and selling the individual bonds. Still, the best answer to risk is not to adopt one measure but to embrace as many measures as possible and aggregate them to get a feel for what they indicate the overall risk is. Q:  How do you foresee the course of bond markets in the next decade? A : There has been a very long rally in fixed income securities and at some point – it is hard to forecast when exactly –a credible reserve currency alternative to the dollar is likely to emerge. In fact, the U.S. has to begin to be quite mindful of the risk of higher interest rates. In the eventual outcome of U.S. rates rising, the levers that need to be pulled in any bond portfolio to help protect against that are likely to decrease the overall duration in the portfolio. High yield would provide some insulation from a move higher as would other spread sectors. Should this scenario unfold, the key will be to avoid overexposure to the most overvalued security – the German bund and the U.S. Treasury. Treasury Inflation-Protected Securities would be another way to insulate against the higher inflation and the fund could also allocate to emerging market bonds on the margin.