Q:  What is the history of the company and the fund? A : Gateway Investment Advisers was founded in Cincinnati, Ohio in 1977 to take advantage of the new products and risk management tools that were being developed as the options markets in Chicago were getting up and running. Back in the seventies, the idea that options markets give investors a way to gain exposure to risk or to remove risk from a portfolio was brand new. Having that in an exchange-traded accessible format for investors was also new. Building investment products around that was even more innovative, particularly in the late seventies. The Gateway Fund really did not have any peers at the time. It wasn’t until the nineties that anyone tried to offer these sophisticated hedging techniques in a retail mutual fund structure. As the options markets grew, Gateway’s strategies grew. When Gateway started, there were only options on individual stocks. Early on, only call options were available and not put options, and as products and markets developed so the fund developed. Our firm has focused on the hedged equity investment type of strategy all along. Walter Sall, our founder, retired a couple of years ago and handed over the reins to other long-time employees. We currently manage about $12 billion in total assets; the open-ended Gateway Fund with about $8 billion is our largest fund. All the assets are invested in hedged equity strategies using options tools in a very straightforward way. The goal is to add a healthy dose of risk management to equity investing. The track record of the Gateway Fund goes back to 1988, when we added a downside risk component to the fund. The only real significant thing that has happened since is that in 2008 we became part of Natixis Global Asset Management. Q:  What about your investment philosophy is especially about risk management? A : Our investment philosophy is centered on the idea that equity investing over the long term is extremely beneficial to investors. The negative thing about investing in the stock market is that there can be quite a bit of volatility. The drawdowns and rollercoaster ride associated with that can be off-putting for investors. We believe there are ways to realize the benefits of investing in equity markets but to do so in a way that is much more risk controlled. Adding risk management to an equity portfolio can help tailor the risk and return profile of an equity investment so that an investor experiences less dramatic ups and downs. Our risk-controlled approach puts Gateway in a category with a number of different types of lower risk equity-based funds, although our strategy is unique in the market. We are seeking to appeal to investors by giving them a tool to stay invested in equity markets even if their risk tolerance is low. Q:  Organizationally you operate as a team or you are a single-manager type fund? A : The investment management team consists of five individuals. All but one of us has been here for over 14 years. The “new guy” has been here for three years. We think we are smarter as a team than we are as individuals. We sit in a large room and work together. We are not isolated on different floors or in offices behind closed doors. The process of evaluating our strategy and making decisions involves a very collaborative ongoing discussion that happens every day in formal and informal ways. Q:  What is unique about your investment process? A : We want to make sure our investment approach is a repeatable process, consistently applied, and that a significant amount of discipline and constraints are built around what we do. Our focus is on risk. Because we use options to tailor the risk profile of an underlying equity market investment, risk management is fundamental to what we do. We target risk and, in managing the risks in the portfolio, we are aware of all exposures, sensitivity to movements in the market and changes in volatility. The strategy itself is made up of three moving parts. At the core we invest in a stock portfolio, the goal of which is to track the S&P 500 Index. That is our beta exposure. That is our core portfolio that we want to perform over the long term in line with the broader US equity markets. We are not stock pickers and we are not market timers. The other two components are the risk management side of the equation and the tools that we use to both generate return but also dampen volatility that is associated with that equity portfolio. We use very straightforward, consistently applied risk management techniques. We only use exchange traded S&P 500 listed options contracts traded on the Chicago Board of Options Exchange. We do not use any off-market, counterparty risk-type derivatives. We use very liquid options contracts. We write call options against the value of the underlying equity portfolio. Effectively we are generating cash flow by selling off the volatility associated with the portfolio. By selling call options on the index we are exchanging the future unknown performance of that stock market portfolio for the certainty of a cash payment up front. We take a diversified approach where we sell a portfolio of call options with a variety of expirations and a variety of strike prices. Over time that cash flow is a very large return generator for us. It certainly provides a dose of risk management because you are getting cash to help smooth out the smaller bumps over the shorter term. We also think that there are infrequent, but real, risks that the market will correct from time to time. We think it is prudent to take a portion of that cash flow and buy some downside protection. We take a portion of that call writing cash flow and we buy a portfolio of S&P 500 put options. Those act effectively to absorb some of the volatility associated with stock market investing. As the market falls, the put options increase in value. They do not help avoid 100% of the market’s losses, but when markets correct, they help us to limit losses to what we consider are recoverable in a reasonable amount of time. A core tenet of our philosophy is that if an investor can take steps over the course of an equity-investing life to avoid large losses and spend less time earning back from the occasional significant loss, they can have more success overall. From a mathematical point of view, having to earn back an infrequent 10% loss, as compared to a 40% loss, is a worthwhile endeavor. From a peer point of view there are a number of strategies and funds out there that have a similar risk and return profile to Gateway Fund. What differentiates us is our very long track record. Gateway is the second largest alternative fund when compared to its peers. Its one of the least expensive; we have a shareholder friendly board that is focused on ensuring that as the fund grows the shareholders benefit. We have a very large asset base to spread costs around and we try to pass those savings along to shareholders. Q:  How tax efficient is your investing process? A : Gateway’s strategy is also among the most tax efficient hedged equity strategies. We build a level of tax efficiency into the strategy. For example, we have not had a capital gains distribution since 2000, even though the fund has had meaningful economic gains over that time period. We do not leverage the portfolio. If you look at our portfolio from an accounting-balance-sheet perspective, there are assets and liabilities. On the asset side you have a stock portfolio and put options, both of which are fully paid and are long in the portfolio. On the liability side is the short call option portfolio. We try and maintain a cash position in the account that roughly offsets the call-liability, because we believe it is prudent to have the cash on hand buy back all of the calls if necessary. Q:  What is your research process and how you analyze volatility? A : Our process is different from a traditional long-only manager. Options, unlike stocks, have a limited life. We are fairly short-term options investors, which means that every month a significant number of options positions will expire. As a result, decision points happen every month. In more volatile markets it can happen much more frequently. As a team, we try to arrive at a consensus in terms of our decisions. Each of us brings to the table a certain macro-economic view. We spend time looking at the macro picture, but our research is more focused on market volatility and how it is being priced in comparison with past periods of stock market environments, both macro and technical on the S&P 500 Index. A lot of mathematics also goes along with portfolios of options and the quantitative aspects of different types of exposures. Gateway’s is not a black box strategy because human beings make the decisions. We view the macro picture through the lens of volatility. The context of what the market is doing, whether it is complacently or fearfully pricing that into options markets, is important because we are risk managers. We are selling risk with calls and we are buying some risk exposure and protection with puts. And the market changes every day. A significant amount of investor sentiment is determined by how risk is being priced in the options markets. That is why the VIX is called the “fear index.” It has a temperament like the investment public and any changes are what we are trying to take advantage of with our hedging. Our strategy seeks to sell rich cash flow and buy it back when it is cheaper. We are not stock pickers. Gateway’s stock portfolio is largely in line with the S&P 500 Index. A lot of our analysis and quantitative work is focused on the options side and is very much centered on volatility. You can think of volatility as another word for uncertainty. There tends to be more uncertainty in life and in the investment markets over the short term. The longer the time horizon, the more comfortable one can get with a certain range of potential outcomes, as compared to the short term. When you look at how options are priced, there is more uncertainty, more volatility, priced into shorter-term options than longer-term options. Q:  What is your portfolio construction process and what are your views on benchmarks? A : When we build our portfolios of hedge positions, we tend to have a portfolio of one, two, and three-month options on the call side. On the put side, we tend to be a little bit longer with one, two, three, and four-month options. We think being short provides a good balance between the uncertainty that is in the market over the short term and helps convert that into cash flow. That balances with the ability to change or modify the positions, as markets and volatility change. Because one of the elements of our process is tax efficiency, we build some loss-harvesting processes into the stock portfolio of the Gateway Fund. Our approach to owning stocks is to have a portfolio that tracks the S&P 500 Index achieved using a quantitative approach. Essentially it is a multi-factor approach that scans the 4,000-name universe of listed equities in the US. We do not trade stocks often. We manage the portfolio on a day-to-day basis and when we need to tighten that tracking error to the S&P 500 we do. But, when you look at our top ten holdings, our portfolio is dominated by large cap names. Our quantitative approach seeks to gain the advantage that exposure to the stock market provides, but we do not try to generate alpha by favoring or avoiding particular names or sectors. We try to match the beta of the S&P 500 Index because the Fund is invested in S&P 500 Index options. We want to ensure that the index that the options in our portfolio tracks is very similar in performance to our stock portfolio. One of the challenges we have had over the years is there is no perfect benchmark for a strategy like ours. We use a number of benchmarks to see how we are doing. Investors use different benchmarks depending on how they are positioning Gateway Fund in their portfolios. Many investors benchmark Gateway Fund to the S&P 500 Index. Because the portfolio’s risk profile tends to be more similar to intermediate to long-term fixed-income, such as Barclays aggregate investment profile, others benchmark us to a more traditional 60/40 stocks and bonds portfolio. Still others benchmark us to a long-short peer group. Q:  How do you define and manage risk? A : In our world, risk is the permanent loss of capital. There is volatility and there is day-to-day risk, but the real risk that affects investors over the long term is permanent, locked in losses of capital that require spending a significant amount of time to earn back. We target risk in the portfolio, not return. The return is based on the market’s view of risk and how volatility is being priced. What we control is the risk profile of the underlying portfolio. When you look at Gateway’s strategy through the bear markets of the early 2000s and the 2008-2009 period, managing those risks is what helped us have returns that are competitive with the un-hedged stock market and, along with avoiding large losses in the first place, put us in a position to earn back the losses in a much shorter amount of time. There is no magic strategy that avoids all the losses and gives investors all the upside. Risk and return are the natural balance of long-term investing. We think there are compelling ways, outside of traditional diversification and rebalancing, to address the downside risk in the equity markets. All of our decision-making processes are trade-offs of risk and return. Over the Fund’s 25-year track record, we have been able to achieve approximately three quarters of the return of the stock market with about one third of the risk. That is a risk profile that we are comfortable with. There is a lot of variability as markets move and it is not like that every day, every quarter, or every year, but the balance of getting greater upside participation in markets and less downside participation is a worthwhile goal. The way we invest may appear backwards to some people. We are comfortable with a certain amount of risk. We position the Fund’s portfolio to accept a certain amount of downside risk and certain participation levels. Given that we are selling options, the level of volatility in the market determines how much investors are willing to pay us to be in that position. Our strategy is slow and steady. It seeks to be a consistent performer. It seeks to avoid much of the downside and does not really participate too much on the upside. The consistency of this approach provides a stable core to build around. Investors who use Gateway Fund in their portfolio tend to include it in a more stable and conservative part of the portfolio and reserve more exciting, beta-types of investments for other parts of the portfolio. The goal of the fund is to balance and offset the risk of investing in those other types of strategies. The fund tends to be found in conservative portfolios, particularly where there is less risk tolerance or more of a focus on steady performance rather than on market-beating returns every quarter or every year.