Q:  Would you give an overview of the fund? A : The Hartford Mutual Funds offers a range of mutual funds including equity, fixed income, asset allocation and target retirement funds. The Hartford High Yield Fund is sub-advised by Wellington Management Company, LLP, an independent institutional money manager. Prior to May 2012, the fund was sub-advised by Hartford Investment Management Company. Q:  How would you define your investment philosophy? A : The key to our investment philosophy is exploiting inefficiencies and pricing default risks that exist in the high yield market. Our view is that participants chase yield and bid up bonds to prices that are not reflective of the underlying risk they are taking. Over the long run, we think that a higher quality bias wins, but a key part of our philosophy is to add value by opportunistically taking on a higher risk profile when risk is priced appropriately. We focus on protecting investor principal in down markets, but don’t want to cede the upside when we think it makes sense to take on more risk. I’d also say that we “stick to our knitting”. We focus on High Yield investing, not on adding value from other sectors outside of our expertise or on duration or foreign exchange risk. Risk management is embedded throughout the process. Q:  How do you transform this philosophy into an investment strategy? A : We have a couple of elements in our process that are important in helping us navigate through a credit cycle and construct a portfolio with the potential to outperform. To do that, we utilize a combination of a bottom-up and a top-down process. The top-down process involves a lot of analysis of econometric and historical valuation data. We analyze a number of internally generated quantitative models to understand where we are in a credit cycle and how the portfolio is positioned from an overall risk posture perspective in order to improve our odds of winning in that specific part of the credit cycle. We break our overall process into four main categories, with each of these parts of the process having their own individual steps. The whole idea and thinking behind creating this process is to enable us to more systematically harness the good ideas generated from Wellington’s research resources. After all, we are trying to find a way to systematically get good ideas into the portfolio so that we can have consistent performance in the future as well. The first of the four pieces in the investment process is our broad top-down strategy, followed by the best ideas from our bottom-up research. The third piece is the portfolio construction, which is based on bringing together the top-down and bottom-up processes. The last part of the process is our risk management. I mention it last but it really occurs throughout the process and is a critical component of our processes. Q:  What are the analytical steps in your research process? A : As we go through a number of quantitative and relative value analytics, as well as macroeconomic indicators that have been important historically, we discuss the current risk environment and the best way for a high yield portfolio to take advantage of these developments. As far as the top-down process is concerned, we have a regularly scheduled strategy meeting with various groups outside of Wellington’s high yield experts to broaden our thinking with respect to risk and return in the market. For us, diversity of ideas is a very important part of the formal process. As a further step, we tend to look 24 months ahead to identify inflection points in the current business cycle. The bottom-up process, on the other hand, involves leveraging our research analysts’ best ideas. We have a group of very experienced bottom-up research analysts who work directly in our high yield group with a steady focus on adding alpha to the high yield portfolio. That is in fact where the majority of our bottom-up investment ideas come from. One of our core assets is the interplay of research analytics across different departments of the firm. In other words, we are getting a lot of high quality data, information and research ideas from our own analysts in high yield, but they are also leveraging the equity research analyst or quantitative analyst in other areas in the company to broaden their understanding of the overall opportunity set in order to select what we think are the best risk-adjusted return ideas for the portfolio. As part of our everyday meetings, our professionals from different departments discuss not only interesting bottom up findings as well as scheduled economic data or any trading information that may be available. Additionally, we have weekly industry reviews and other meetings that enable us to share research ideas and to base them across different functional groups in search of the best decisions. Q:  Would you give some examples to better illustrate your research process? A : In advance of the financial crisis, we concluded that the credit cycle had become relatively long and a lot of the indicators were pointing toward a more turbulent time. To navigate through a more difficult part of the cycle, we looked to industry sectors that showed more stability in free cash flow with less correlation with the broad economic cycle. This work created more portfolio exposure in sectors such as healthcare, cable television, and telecommunications. From a top-down perspective, we are looking for ideas that have low correlation with broad economic drivers, while from a bottom-up standpoint we work very closely with our research analysts to identify the most interesting ideas in that particular space. Our objective is to find ideas where we have individual credits that would generate a stable free cash flow even in a slower economic environment. In these types of instances, we are finding what we think are very good bottom-up ideas. It is essential that we pick good credits that can generate sustainable free cash flows. Q:  How do you build your portfolio? A : For us, it is extremely important to do deep fundamental credit work on every credit before they become part of the portfolio. The first line of defense is to find credits that have a strategic advantage and the ability to generate free cash flow in order to improve the balance sheet in a way that the credit quality improves along with the value of the bond. An additional source of protection is diversification. We run diversified portfolios with the number of holdings ranging between 100 and 150 names. That gives us a nice balance between meaningful diversification and the possibility for the individual names that we like from a fundamental credit research process point to add value for our shareholders. With respect to the asymmetry of return, a very important characteristic of high yield bonds, we adjust our risk posture through the course of a cycle by leaning a little bit defensively to avoid a value trap. Q:  What are the main sources of alpha in the portfolio? A : We focus on adding alpha from three primary areas. The first is fundamental credit research, where most of our value comes over time, whereas the next two sources are top-down drivers – one is industry allocation or sector rotation strategy – and the last is our top-down risk positioning, where we adjust our overall market risk posture from more conservative to more aggressive depending on where we are in a credit cycle. Q:  How do you manage risks in the fund? A : Risk is monitored throughout the investment process and managed at the security, sector, and total portfolio level. The objective of our risk management process is to actively manage the risks in the portfolios which will lead to higher risk-adjusted returns in a wide variety of market environments. Risk management is integrated into the portfolio construction process through daily real-time pre-trade and post-trade analysis, correlation analysis, and sizing of positions according to individual and collective risk characteristics. We use multiple measures to analyze risk as we do not think one single measure fully captures all sources of risk. Some of the measures that we look to include are: prospective tracking error; portfolio beta; percent of CCC-rated securities in the portfolio versus the benchmark; weighted average OAS versus the benchmark; weighted average credit quality using external ratings and internal credit risk ratings; duration times spread of the portfolio versus the benchmark. In addition to my own “embedded” risk team, a key element of the risk management process, across fixed income, not just in High Yield, is to have independent groups monitor and assess the risks in client portfolios. Fixed Income Product Management, a Risk Advisory Council and the Fixed Income Review Group are groups involved in this process.