Q:  What is the history of the fund? A : The fund was launched in June 2007 as a global income fund with a mandate to invest in sovereign bonds in Western Europe and Japan and benchmarked against the J.P. Morgan GBI Global index. In early 2010 we reevaluated the fund structure. We believed that by investing in euros and yen only, we were missing other global currency opportunities. We also did not like the way the benchmark was capitalization weighted; governments that had more debt got a larger weight in the index. We decided to change the portfolio composition to something that we thought made more sense but was still in the spirit of buying government debt denominated in foreign currencies. We decided to build a broad and diversified portfolio with more exposure to emerging market countries, and at the same time reduce the duration of the fund. Q:  Why should investors and advisors consider this fund? A : We believe all investors that consider investing in fixed income vehicles should have exposure to currencies as a way to diversify their portfolios. For investors interested in earning income, we believe we are positioned to produce attractive income, especially considering the low volatility and risk management structure of the fund. We believe most investors are underexposed to foreign currencies. Too many investments are held in dollar denominated investments. Investors get a nice diversification benefit from investment exposure to foreign currencies. Many Financial Advisors have told us that they already have foreign currency exposure in their clients’ portfolios because they have either an emerging market equity fund an international equity fund, or a global bond fund. They do have foreign currency exposure through those vehicles. However, currencies may not be the fund managers’ primary area of expertise and they may not be managing their fund for currency risks. We focus on identifying countries where we believe the currency has a good chance of appreciating over time or where interest rates are high enough that any depreciation that might be experienced will be more than compensated by the interest earned over the time we hold the investment. We are specifically managing currency risk and we think that is the right way to get exposure to this diversifying factor in your portfolio. Q:  What markets and instruments do you invest in? A : We are buying government treasury bills issued in local markets, in local currencies around the world. About 80% to 90% of our exposure is achieved in this way. The remaining exposure comes through the use of foreign currency forward contracts. Most of these investments mature within one year, which means we are not taking a lot of interest rate risk in the countries where we are investing. Q:  How is your fund different from your peers? A : There are a few things that set us apart from our peers. We believe we are more broadly diversified than any other currency fund available. We typically have exposure to about 35 to 40 currencies and have the ability to settle trades in about 90 local markets. We also invest in a blend of frontier markets, emerging markets and developed markets. Typically, we prefer to limit our exposure to 5% or less for each currency. This helps us achieve lower volatility. We have found that most other funds tend to focus on a single market segment, like emerging markets, and tend to have higher concentrations of individual currencies. Finally, we are long terms investors. When we make an investment, we are looking for returns over the next one – two years, whereas most currency investors trade more frequently than that. Q:  What is your research process? What metrics you look for? A : We are focused on understanding long term growth potential which we believe drives currency valuation. We believe good economic policy leads to strong long term growth. We are looking for governments that are implementing good economic policy. We want governments to be fiscally responsible. We want central banks to be independent and committed to fighting inflation. We like to see governments that are liberalizing the economy by freeing up labor markets, enforcing property rights, operating within the rule of law, and clamping down on corruption. In countries where these policies are in place, businesses can invest with a high level of confidence. As an example, we have a very positive outlook on Mexico. Since the new president was elected in June 2012, the government has embarked on an aggressive reform program. They have passed an education, a labor market and a telecoms reform and are in the process of discussing a tax reform and opening the energy market to private sector participation. We believe these reforms will drive stronger growth over the long-term and will result in appreciation of the Mexican peso. We also think it is important to avoid bad situations. Brazil is a country that concerns us. It is a high commodity exporter, which given today’s high commodity prices, leads to the assumption that Brazil has a current account surplus. In fact, Brazil has a current account deficit that has been widening for a number of years. In addition, the government has intervened more aggressively in the economy in recent years mainly by offering subsidized loans to large companies in preferred industries through a number of state banks. We believe this is bad policy and will result in slower growth in the long run. Regarding metrics, we examine a standard range of economic data that includes the growth rate of the economy, inflation and trade data. These indicators help us understand where the country is in the business cycle, which helps us decide on the timing of entering or exiting the position. We also look at local interest rates because they are an important source of return and provide a cushion against losses in the event that the currency moves against our predictions. Q:  What is your portfolio construction process? What are your views on currency benchmarks? A : In principle, we believe the way investors should get currency exposure is through an equally weighted basket of currencies from around the world. This is not practical for a number of reasons, such as the presence of capital controls, the difficulty of market access and other legal and political restrictions. When putting together our currency investment universe, we start by excluding countries we cannot access and those with unsustainable policies. We then examine where we believe the return can possibly be better. We assess relative value and overweight or underweight what starts as an equally weighted basket of holdings based on that analysis and our research. Many of the existing currency benchmarks do not make sense from an investment perspective. Most currency benchmarks have far too much euro and yen exposure included. Some examples are the DXY Index, the Fed’s Trade Weighted Index, or the Barclays Index—which is essentially the same as the Fed’s Trade Weighted Index for the dollar. The J. P. Morgan ELMI, or Emerging Local Market Index, is interesting because it is based on economic relationships. However, we think it is flawed because it is too heavily weighted towards Asia and includes too many pegged or heavily managed currencies. Q:  What are your limitations on individual holdings allocation? A : For diversification purposes, we try to limit our exposure to no more than 5% for any single currency. Even when we identify a currency we really like, we try to keep the position at 5% to stay focused on being broadly diversified, long term investors. Q:  How do you define and manage risk? A : We believe the most significant risk for investors is the risk of losing money. Therefore, when managing the risk of the fund, we are focused on reducing the probability of losing money. To achieve this goal, we focus on a number of factors. First, we try to reduce volatility through diversification and by limiting position size. Second, we believe it is important to understand implicit exposures. For example, Eastern European currencies tend to move very closely with the Euro. Therefore, when you invest in Eastern Europe, you are building up an implicit exposure to the Euro. We don’t want this exposure so we short Euros against our long term Eastern European currency positions. This has the effect of both significantly reducing the volatility of the fund, and isolating the investment exposure that we want. Third, when investing in any market, it is important to understand liquidity. In less liquid markets, investors should be prepared to exit the market earlier than planned to avoid potential big losses driven by a lack of liquidity. Last, but far from least, we believe it is important to understand the forces at work that could have economic, political or social ramifications for any particular country. Often, these types of risk do not appear in quantitative measurements and failing to understand them could leave your portfolio exposed to large risks that you do not want to take. Our research process is focused on, among other things, understanding these risks and avoiding them.