Q:  What is the investment philosophy behind the fund? A : We seek to identify value in the global fixed income markets. And, given our value bent, we are patient investors. At the end of the day, you could say we look for bad things to happen to good companies and good countries. We like to buy when bonds are being sold off and we have high conviction that our ideas will pay off in the long term. We are always looking for opportunities worldwide. In our view, the beauty in a global discipline is that once we have done the research to identify a credit with a great potential, we can apply a multicurrency approach to it. When we are convinced of the upgrade potential of a corporate bond, we prefer to buy longer maturities. Historically, we have focused on deep discount bonds that offer capital appreciation potential. Q:  Would you elaborate on your research process? A : At Loomis Sayles, we believe that research is the most important investment we can make on behalf of our clients. In 2005, Loomis Sayles will commit more than $27 million to its research efforts. A key advantage is that all the research work done here is tailored for the benefit of the various investment strategies Loomis Sayles offers its clients and shareholders. As for the depth of our fixed income research, we cover about 95% of the Lehman Credit Index in the United States and roughly 80% of the Lehman Global Aggregate universe, excluding the highly rated banking sector. On a sovereign research basis, we cover 57 countries. We also attend company road shows, participate in company conference calls as well as conduct hundreds of site visits to meet with company managements. As far as sovereign research is concerned, we meet and speak with government officials several times a year. For example, when David visited South Africa shortly after the old government passed the reigns to their successors, he met with both members of the new and the old government. Even though the members of the old government were not happy with yielding power, they assured David that the new government was doing a good job with the budget accounts. In that situation we took great comfort in the fact that we had a good sense of transparency in the work of the government. Q:  How do you blend your philosophy and research into a successful strategy? A : One of our fundamental principles is that we will not invest in a bond or a country unless it has a Loomis Sayles internal research rating. Our research analysts are not limited to covering investment grade bonds only. They explore opportunities across the entire credit spectrum. From our perspective this gives us a significant competitive advantage. Q:  Can you give us some examples of investments that you have identified as value picks? A : After the Asian crisis, between 1998 and 2000, South Korea was one of our largest sovereign holdings. When South Korea started to widen from 200 to 300 basis points over U.S. Treasuries, in terms of the Yankee bonds, to around 500 basis points over, we started to buy the bond. Because we tend to invest in hard currency bonds, we were buying South Korean bonds trading at a spread over the U.S. Treasury curve and denominated in U.S. dollars. Typically, we were buying companies such as Korea Development Bank and Samsung Electronics. When Korea widened out to over 1,000 basis points over U.S. Treasuries, we had to do a serious gut check to assess the country's ability to overcome the crisis before we would keep adding to the position. We were heartened by the fact that the government asked individuals to turn in gold, which enabled the country to repay some of its debt. Meanwhile, Argentina was trading at 1,000 basis points over U.S. Treasuries too, but we saw Korea as mispriced because of the fundamental differences between the two economies. While Argentina is still primarily an agricultural export economy, Korea is a major manufacturer of high tech products. Korea was one of our best performing bonds but, of course, we had to trim back some of those holdings for risk control purposes. At the same time convertible bonds had fallen tremendously in price. They had lost nearly all of their optionality to the equity call and were trading as a high yield substitute. One of the best performing bonds from the late 90s to the early 00s was the convertible bond of Samsung Electronics. Unfortunately, the convertible bond space has already been seized by the hedge funds that have come in to do their arbitrage between convertibles and straight debt. It is no longer a spot in the marketplace where we, or even some of our peers, would buy these bonds at big discounts as high yield substitutes. Q:  Which index serves as benchmark for the portfolio? A : We think it's important to note that part of our philosophy is that we are benchmark aware, but not benchmark driven. In the past, the Fund was benchmarked against the World Government Bond Index. In 2001, the benchmark was changed to the Lehman Global Aggregate Bond Index. One of the reasons why we like the new benchmark is that it includes about a 17% corporate bond weighting. Q:  What screening methods do you use? A : There are basically five areas, as integral components to our research and screening processes, where we think we can add excess return to the portfolio. The first three are defined by macro characteristics - currency, yield curve, and sector. On a bottom-up basis, we look at individual security selection and sector selection. We take a top-down view of the world economies with a formal macroeconomic process that occurs every six weeks as part of our fixed income group's bond policy committee. The goal of this exercise is to provide the economic team, the sovereign team and all the portfolio managers with a perspective on the world economies. We then use the macroeconomic forecast to make our bets on the different sectors and asset classes. We also have the benefit of 10 different asset class teams comprised of research analysts that meet formally on a weekly basis and informally on a daily basis before they distribute their views and recommendations on a particular sector within an asset class. The research analysts put two ratings on every bond they regularly track: a valuation rating, and a risk rating for core versus speculative holdings. Q:  Could you describe the portfolio construction process? A : As portfolio managers, we utilize all the input from the macroeconomic and the asset class teams for the construction of the portfolio based on the objectives and the guidelines of the fund. The fund generally holds between 110 and 120 securities. Typically, when we add a corporate bond to the portfolio we use a building block size of 1%, while the building block size for high yield bonds is 0.5%. The maximum allocation portion for below investment grade holdings is 20%. We start the portfolio construction process with an emphasis on currency allocations in order to determine the regions in which we want to be overweight. Then, we establish duration by currency by looking at the different regional markets. Ultimately, we decide what credit ideas will go into the portfolio, using the flexibility of global investing that enables us to buy corporate bonds in different currencies. Q:  What is your buy and sell discipline? A : As a result of the analytical work of our research teams, which we described earlier, we receive a buy and sell list of individual securities. With this information, David and I then apply our own expertise and individual skills honed over our 55 years of combined experience to arrive at optimal sector weights and holdings for the fund. A material change in the fundamentals of a sovereign, industry or a company certainly will give us cause to take a bond out of the portfolio. We will also sell a holding if our research team downgrades a bond issuer. Another alarm for us is if the rating agencies for example have given a BBB rating to one of our holdings, but it is trading as a BB bond. We would be naive to think that this bond does not have the potential to be formally downgraded to a BB rating in the future. Q:  How do you control risk in the portfolio? A : We use a number of tools to monitor and control risk in the portfolio. We are fortunate in that we have access to a robust suite of systems that enable us to readily track measures such as the fund's differences relative to the benchmark, ex-ante tracking error relative to the benchmark and ex-post multivariate attribution. Ultimately, David and I believe that there are two ways for money managers to lose money. The first is to allow any one holding drag down the entire portfolio. Another, too many holdings in a sector with similar characteristics - such as the telecom space in 2000 - can pose a threat to an investment portfolio. For these reasons, our main risk control is the strict limitation on position size. Given that we match our exposure against the Lehman Global Aggregate benchmark, we do not have to maintain a credit only portfolio. With the benchmark being only about 17% to 20% credit, we can be overweight credit or underweight credit, but we do not need to have 5% of the portfolio invested in one credit idea.