Q:  Would you provide an overview of the company? A : Stone Harbor Investment Partners LLP is a global institutional fixed-income investment manager founded in April 2006. Today, we have over $32.5 billion in assets under management, of which about $22 billion is in emerging markets debt globally. We are 100% employee owned. We manage money for sovereign wealth funds, pension funds, foundations and endowments, corporations, and union multi-employer entities as well. Our Emerging Markets Debt Strategy is available both as an open-end mutual fund available to institutional investors, as well as through the recently launched closed-end fund product. Q:  What are the core principles of your investment philosophy? A : We believe that the key to successfully generating excess returns is the combination of a disciplined process of rigorous credit analysis and a significant ongoing investment in people and technology. Our belief is that the market itself will be the best performing fixed income asset class over the next ten years. We think that a prudent way to position ourselves in this asset class is by investing in a well-diversified portfolio of improving emerging market debt instruments to develop solid strong long-term performance. Moreover, there has been substantial growth in cross-border equity and fixed income investment and trade flows. We expect these trends to continue. Q:  What are the advantages of investing in emerging markets? A : Emerging countries are growing quite fast with much better debt dynamics and significantly better fiscal discipline and economic management than their established peers. We think this asset class is attractive because it can provide higher returns versus other fixed income and equity asset classes. Another advantage is in the fundamentals. The average debt-to-GDP ratio for the countries within the emerging markets universe is 33% while for the developed market economies it is just around 100%. So, the relative fundamental difference between investing in an emerging market compared to a developed market is pretty shocking. This fundamental underpinning, when combined with a significant growth differential between the emerging markets and developed markets, has led to a situation wherein emerging markets as a share of global GDP will surpass the advanced economies within the next several years. In addition, the low debt-to-GDP ratio in emerging markets combined with a massive stock piling of foreign reserves of about $6 trillion has given them a cushion against external shocks. Q:  How do you transform your philosophy into an investment strategy? A : The fund normally invests at least 80% of its net assets in emerging markets securities that include fixed income securities and other instruments that are economically tied to emerging market countries. We closely monitor the universe of emerging market opportunities and believe the key to success is a rigorous focus on our credit solution, which starts with a credit quality analysis. We also identify market inefficiencies and undervalued debt securities. By utilizing a number of quantitative tools for the continuous monitoring and evaluation of risk, we identify investment opportunities and thus seek to minimize losses. Q:  What is your research process? A : We use a disciplined approach to investing in emerging market debt securities. In managing emerging market debt portfolios, we view country analysis as a very important factor driving long-term returns. The country assessments are based on a combination of fundamental quantitative measures and qualitative factors, including political stability and the credibility of monetary and fiscal policy. The quantitative analysis focuses on cash flow analysis, balance sheet analysis, and growth analysis. This leads us to a conclusion on a country’s ability to service its debt during good times or bad times. We monitor central bank, monetary and foreign exchange policies and look at the political dynamic within the countries. We also do a significant number of country visits. On average, we visit about 25 countries a year. For us that is a very important aspect of the research process. We also have a very active dialog with a number of think tanks that we have on retainer. This communication enables us to paint a picture, from a political standpoint, of the country’s willingness to implement reforms that would be necessary to improve their debt servicing capacity. We do this analysis for every country in the market and that will lead us to conclusions about the country’s credit quality. Our country credit quality determinations are then weighed against valuations of debt instruments in the sovereign and corporate debt markets denominated in both hard and local currencies. Q:  How many countries are included in the emerging markets category? A : There are somewhere in the order of 45 to 50 countries that we can realistically get exposure to. There are 35 or so that are more liquid than the rest, but we look at a number of countries that are much smaller and are classified as frontier markets. Q:  Do you rely much on rating agencies? A : The ratings agencies do a lot of analysis, though we find that they tend to lag the market, both on the upside and the downside, so we prefer to do our own individual analysis. Q:  Could you illustrate your research process with a few examples? A : Let us take a look at Brazil. From a fundamental standpoint, Brazil’s external debt service is very low. In fact, Brazil has more reserves than external debt liabilities. There has been a great deal of foreign direct investment in the country in the last ten years and this, combined with improving fundamentals has caused significant upward pressure on its currency. Brazil also has one of the highest real rates in the world. While Brazil has a recent history of hiking rates to curb inflation the market has been very skeptical of Brazil’s commitment to lowering inflation due to Brazil’s history of hyperinflation in the early 1990’s. This “credibility gap” has caused Brazil to have some of the highest absolute rates in the emerging markets. We thought the local markets in Brazil were a particularly attractive story given the fact that we believed the Central Bank would continue to be aggressive on the inflation front and eventually this credibility gap would narrow. We invested in long duration Brazilian local currency debt to capture the yield compression and currency appreciation and it worked extremely well for us. Iraq is another story that we liked a lot. We took a very hard look at the fundamentals and politics in Iraq and we came to the conclusion that Iraq was a country that could experience significant upside in its bonds. We were buying the bonds in the low $40-ish range in 2008. From a fundamental standpoint, Iraq has grown significantly since its debt restructure in 2006. It doesn’t have a very high debt service ratio and has a huge amount of oil and hydrocarbon deposits that are relatively easy to develop. From an investment standpoint, Iraq should continue to grow strongly given the significant FDI combined with internal domestic production. This growth story, in addition to the country having one of the top stockpiles of oil reserves, will have huge positive ramifications in the long term. Q:  How do you execute your portfolio construction? A : We tend to have approximately 100 names in the portfolio and we use the JPMorgan Global Diversified Emerging Market Bond Index as our benchmark. In terms of composition, we have somewhere in the order of 15% invested in local currency bonds, 15% in corporate bonds and the rest is in sovereign hard currency debt of emerging markets. From an exposure standpoint, we run very diversified portfolios with our largest allocation currently below 9%. Q:  What do you consider primary risks in the portfolio and how do you contain them? A : The biggest risk right now is the debt crisis in Europe, the dollar crisis or the U.S. Treasury bond crisis. The sovereign debt crisis in the peripheral nations in the euro zone is not easy to solve. Member nations in the EU have been attempting to reduce the level of contamination risk to the region, but there still remains a real possibility that at some point these debts are likely to inflict some losses to bond holders. We believe that risk is not priced into the market and we protect our fund by underweighting in euro and holding debts in the euro zone of shorter maturity. Q:  Do you think China’s slowdown will have an impact on your portfolio? A : Yes. China has been a big investment in emerging markets - plant equipment, construction and what not. China has played a huge part in the global growth story. If there is a growth upset there, that will affect risk appetite globally.