Q:  What core principles guide your investment philosophy? A : Our philosophy is based on the premise that markets are inefficient and that the best way to capitalize on those inefficiencies is through a blend of quantitative and fundamental research. We believe that integrated research is key to success in managing all different types of fixed income portfolios. We seek to identify high-income opportunities across all fixed-income sectors that we believe offer the best balance between risk and return. Q:  What is your investment objective? How do you achieve it? A : This fund is designed to generate a high level of income. Our belief is that at any given time it is prudent to source income from a variety of places. What that means at a very tactical level is that we move assets around over periods of time. For instance, four or five years ago, we had a large part of the portfolio in emerging market debt, a lot of it in local currency debt, whereas today we have less than 20%. Back in 2009, we bought commercial mortgage-backed securities. That is an asset class which was AAA rated with low risk asset class, and almost overnight it became a risk asset class. Again in 2009, we were buying debts issued by tier-1 financials or largest banks, namely subordinated bank debt at 40% to 50% discount, and we even took positions in the municipal bonds when they were out of favor in early 2011. We do not box ourselves in if a particular area of the market is not attractive. We can either invest very little or not invest at all. Q:  What are the advantages of integrated research that you utilize? A : The problem with having only a fundamental approach is that we get bogged down in whatever our view is and it is very hard to be unbiased about interpreting new information as it comes out. What makes quantitative research attractive is that it is all hard numbers and it is dispassionate. However, the drawback of quantitative research is that it assumes the future is going to be just like the past patterns, which is not always true, and that is why combining the two disciplines is critical to successful investing. For instance, if we look back on 2011, we will see a time when many analysts were very concerned about the peripheral debt crisis in Europe but did not necessarily expect it to spread to the core of Europe. We had a particular quantitative tool using inputs that we built over time and that was signaling Europe was possibly going to go into a crisis mode. As a result, we reduced a lot of our European risk. Of course, many times our quantitative tools give mixed or incorrect signals, and that is why it is extremely important to have strong fundamental research and an experienced portfolio management team to decipher all the inputs we get. Q:  When you say quantitative, do you mean systemic or quantitative? A : We definitely have systemic tools that help us figure out how much risk to take in portfolios, how much beta and how to take it, but we also have micro tools that help us identify attractive securities. We have expected return models and risk models as well as indicators that give us early warning signs on particular companies or countries that we should pay more attention to. We have around 10 quantitative analysts employed full-time who are constantly looking at new emerging stories and market developments. If a signal that was working previously does not work any more, they will work hard to figure out why it is not working. Is it cyclical or is it something secular that has changed about the markets? Our quantitative and fundamental analysts also work together on projects, helping each other for the testing of any thesis with their mutual inputs. Our belief is that having a broad range of tools – both quantitative and fundamental – leads to the greatest probability of successful investing. Q:  How would you describe your research process? A : We have a very disciplined investment process as it relates to all our portfolios. Research is what drives the value we add in all of our portfolios. We have two different forms of research –quantitative and fundamental. They are obviously not always going to tell the same thing, therefore, we have to reconcile all different inputs. Perhaps the most important part of our process is what we call our research review. We have five research review committees comprising of emerging markets, credit, municipal bonds, structured assets, & rates and currencies, and the goal of these committees is to reconcile any differences between the research that we have in order to outline the course of the portfolio. When we have a lot of signs pointing in the same direction, we are going to bet more on that view in our portfolios, and when they are conflicting, we strive to understand the point of differentiation and attempt to reconcile the divergent views. Whatever we end up concluding, we are not likely to take a large bet one way or the other when we get conflicting signals. Generally speaking, at AllianceBernstein we use a whole range of tools to complement the core securities that we invest in while making sure that we have the right risk profile in all our portfolios. Q:  Would you use some examples? A : For example, in 2009 we made a very big bet on debts issued by tier-1 financials. We thought it was a very good bet. We were very diversified and bought mostly tier-1 papers, the subordinated part of bank capital structures. The risk there was that there were provisions to defer the coupon, the probability of which our bank analyst thought was pretty low for a variety of reasons. Our quantitative tools were signaling that these securities were cheap as well. However, there was certainly a systematic risk out there that we could have been wrong. So while taking a significant position in many of these securities, we also bought puts to hedge some of the downside had we been wrong in our assessment of the value in these securities.. We were hoping that these puts would expire worthless (which they did) but it gave us some protection in case we were wrong in our portfolio bet. Q:  Why did you prefer the financial services bonds? A : Bonds issued by financial services were trading like distressed bonds even though they were rated investment grade. We were in a position where we were one of the few buyers as most High Yield investors did not even have a banking analyst since prior to 2009 there were almost no banks that were rated below investment grade. We had a team of people that were following these banks for a long period of time, which proved to be a serious advantage against our peers. Furthermore, we thought it was very unlikely that most of those names would start deferring their coupons as the market was assuming. At that time our research pointed to make a systematic bet in the sector. While we certainly took larger positions in some names than others, we could not necessarily have strong confidence in any one name alone, so we took a broad systematic bet on this space and one that paid off very well. Q:  How do you build your portfolio? A : We start with a broad macro view consisting of the in-depth research done by our economic and credit research teams. We combine that with several beta management quantitative tools that help us identify how much overall risk (beta) to put into portfolios in any given environment and how to broadly structure that risk. We then work with our research teams to identify which countries, industry sectors, asset classes and securities offer the most value at a particular point in time. Our best recommendation to our clients is to build global and multi-sector portfolios and we have proven over time through this fund and others that that is an approach that has the highest likelihood of succeeding over time. We also tend to be very diversified. We currently have about 1,100 individual securities issued by 600 entities, and that is by design as it is more important to avoid the losers in fixed income portfolio than in an equity portfolio. For example, our largest corporate weight is 50 basis points which limits the amount we can lose from any one position in asset classes that have negative skew, meaning that you can lose a lot more money than you can make from any long position. Over time we will migrate the portfolio. For example, we have been reducing emerging market debt and shifting into corporate high yield in the U.S. for the past five years as the emerging market debt market has evolved from one that primarily non-investment grade to one where 60% of EM countries are now rated investment grade and accordingly don’t offer as much income as they once did. We look around to where we are seeing the best value at any point in time.For the most part, we try to move the marginal dollar where we see the best opportunity at a given time. Given the much higher trading costs than more liquid markets such as equities, currencies, or treasuries, we have long time horizons and attempt to keep turnover at relatively low levels. Q:  What risks do you focus on and how do you control them in the portfolio? A : There is a large number of risk measures that we take into consideration. We actually find that no one risk measure really tells the whole story. In our view, tracking error is a flawed measure, as it doesn’t consider what an investor should really be concerned with, which is downside tail risk. We thus spend a lot of time looking at potential tails, hedge some of the risk where appropriate, and maintain ample diversification as I’ve explained.Another important measure we utilize is how much spread and yield we have vs the available opportunity set at any given time. Our team approach is undoubtedly another risk mitigating factor, as we debate things within the team and try and arrive at a consensus. We have a large and experienced team with varying strengths and viewpoints. The members of both the EM and credit teams work closely together in managing this portfolio, something that is rare to find among other fund managers. Finally, our real goal in this portfolio is to deliver the highest income available without subjecting our investors to undue risk of principal. We utilize a wide range of countries, asset classes, and securities to accomplish this goal, the mix of which can vary quite significantly over a full market cycle.