Q:  What are the underlying principles of your investment philosophy? A : The general philosophy of the fund is based on income generation for investors and active management of our bond portfolio through appropriate asset allocation. Even though we maintain a liquidity bias when we are buying corporate bonds, we also believe that some attractive opportunities are found when we dig deeper into smaller issues that may be somewhat less liquid. While the majority of the portfolio will be invested into large, liquid issuers, we realize that there are opportunities in smaller issuer names, less liquid bonds, and potentially crossover credits or bonds, which may be revised to a higher rating and investors cannot buy them for various structural reasons. For example, CVS Pharmacy, the second largest pharmacy chain in the US, has investment grade bullet bonds and also pass-through Trust bonds that are backed by their stores. By gaining access to the latter, we can pick up generally 150 to 200 basis points over a comparable bullet bond of the same issuer. In this example we do trade down in liquidity but think an extra 2% more than compensates us for the give in liquidity. While we are very active in generating income, we seek to hold credits or bonds with improving business fundamentals issued by companies that may be misunderstood or not well followed, where credit spreads are likely to tighten as the story becomes more widely followed Q:  How has your philosophy evolved into an investment strategy? A : Being a corporate bond fund manager, we believe that the primary objective of our strategy is to outperform our benchmark credit index while providing investors with efficient access to the corporate bond market. Our investment strategy uses an important three-step process. We want to invest in the best companies in the right sectors that mesh well with our top-down view on the general corporate bond market. We have a dedicated team of fundamental research analysts who follow individual industries and companies. Their independent research results in not only investments themes and opinions, but also our own actual credit rating of a company, completely independent of the rating agencies. Secondly, our research analysts and traders closest to each individual corporate sector guide our views and weightings in the various corporates sectors which is influenced by both our view on specific companies and our top-down view on the overall corporate bond market. The importance of sector weighting can change over time. However, over the last couple of years, the view on the financial sector has been a big driver of performance. In the current environment, we are closely monitoring our financial exposure to ensure we are on the right side of that investment. Lastly, we develop a thorough view on the economy and the macro backdrop of the corporate market considering liquidity, sentiment, net issuance, technicals and dealer inventory to determine a top-down thesis on the credit market. All three of these decisions ultimately impact our construction of the portfolio. Q:  How do you evaluate ideas? A : The top-down call on credit is made by a team of people. At present, we have four team members who exchange ideas on a regular basis. Each of them is assigned to put a letter rating on where they think macro credit risk should be at any point in time. In assigning ratings from A through E, A and B stand for indications of overweight of varying conviction, while Ds and Es should indicate underweight, respectively. When each team member has contributed his grades, we calculate an average grade, which enables us to determine where we want to be from a top-down perspective. Once we complete the assessment, the individual research analysts will use the same letter grade process on individual credits before the portfolio manager starts using that information to construct the portfolio. When the research analysts put an allocation rating on a security, they also put review levels on spreads for representative bonds and their issuers. The bands that they put around the spread levels are indications of where they would re-evaluate their view on an individual credit. Should one of the credits hit a review level, the analyst is required to revisit the bands and drivers that they thought were going to impact the credit in order to take a fresh look and see if something has changed. If we take a view on a credit undergoing deterioration, we want to make sure that we can react fairly quickly to changes in spread. Of course, if the prospects are looking bright, we let them run their course while trying to capture the upside. Q:  How do you go about selecting individual securities? Could you illustrate with a few examples? A : Our belief is that some of the less understood stories provide much better opportunities. This can be somewhat problematic given the dearth of opportunities. In addition, many times these issuers are on the smaller side and appropriate positioning can end up becoming constrained for this very reason. For instance, Entertainment Properties is a split-rated name, which means that rating agencies have assigned different ratings on their debt. This specialty REIT focuses on movie megaplexes. The large movie complex operator’s bonds are rated BB+ by S&P and we think that all rating agencies will ultimately assign the bonds a BBB rating. In our view, when that finally happens, the story will be more broadly told to the investing community and the spreads will narrow as the bond value increases. This is a classic example of the problem mentioned earlier. We have a very good understanding of the fundamental story and believe it benefits the portfolio, but because they only have one bond outstanding, our position is smaller than it would be otherwise. Another example is Enterprise Rent-A-Car, a private company that issues their bonds in the 144a market. This mechanism enables companies to issue bonds without having to register with the SEC. Since a large number of investors seem to be locked out of that space, we think that this presents us with another attractive opportunity. As far as the business model is concerned, the company has a different rental car model compared to their competitors who tend to focus on leisure and business travel at airports, whereas Enterprise also focuses on city based car rental. Also, about half their revenue comes from replacement car rentals. This model is much less cyclical as it caters to customers who need temporary transportation primarily because their private vehicle is unavailable. Because Enterprise is not locked into buying a certain number of vehicles, they can slow their purchases of new vehicles should conditions dictate. At the same time, they keep selling off their used cars and in that manner they can generate cash when things begin to slow down. Other operators do not have the ability to adjust how many cars they own as easily. As a whole, we see Enterprise as a business that is much less cyclical compared to regular rental car companies. We think it is another underfollowed story with solid potential. Q:  How is your research process different from that of rating agencies? A : We depend more on our own stringent internal research than that generated by the rating agencies, though we do monitor their opinions and use them as a data point for consideration.. Rather than utilizing a static, point-in-time credit rating we use something called a forward fundamental rating that represents what we believe the credit rating of the bond will be six to 12 months. Q:  How do you build your portfolio? A : Portfolio construction begins with our top-down view on credit in general. This view is going to drive the names and level of risk we are trying to put in the portfolio. Taking the macro call in credit into account will then point us into the sectors and names that are most appropriate for the portfolio. If we are constructive on credit, that’s going to lead us into the higher beta sectors for most of our overweight, for example financials. Obviously, if we are more defensive, that leads the portfolio into lower beta credits. The portfolio comprises names from 200 issuers and several hundred securities. We generally look for bonds with attractive yield. More importantly, we want bonds that will outperform that index and provide price appreciation. The portfolio does have an allocation to high yield which has been fairly static over time at around 10%. The fund also purchases bonds from foreign issuers given the Barclays Credit Index is about 15% foreign entities. These bonds are generally denominated in US dollars. Because we are constantly trying to take advantage of opportunities that we identify through our investment process, the turnover ratio could reach approximately 200%. Q:  What is your buy-and-sell discipline? A : As noted, we closely monitor spreads on all our holdings. When an analyst changes an investment opinion the spread levels are noted with the previously mentioned review bands. We maintain a disciplined sell approach in cases where bonds are not behaving as we expect in a meaningful way. If it is behaving as expected, we always have a review level on the upside where we would lighten up. Monitoring market developments on a daily basis, our dedicated team of corporate bond traders is aware of our larger positions and keep portfolio managers apprised of any news that might be affecting portfolios positively or negatively. Q:  Are there certain industries or sectors that you favor or you generally avoid as part of your investment process? A : From a fixed-income standpoint, the toughest sector is probably technology, where almost every name is rather different with its own unique story. As you look across the landscape from Apple to Google to Microsoft to Cisco to Intel you realize each company has its own niche. As a result, leveraging knowledge from company to company is pretty difficult. The technology sector is probably our least favored sector, partly because it is tough to operate there when nobody wants to step up and sponsor the sector as a whole, or even a couple of names. IBM is the only technology name with a long history in the bond market whose bonds are liquid and trade well. The sector in general tends to get lumped in with the much larger and more liquid telecommunication and media sector and as such technology is somewhat treated as an afterthought by many traders. In contrast to that, the telecom media sector trades like the general bond market, and if we are trying to get risk in sync with the market, that is a good space for us to trade within. Yet, this area has recently been overtaken by financials. Those are probably the two sectors we spend the most time in – telecom media for its liquidity advantage and the financial sector for its attractive spreads. Q:  What is your asset allocation process? A : The fund is primarily invested in corporate bonds although we do have some latitude to invest in other sectors such as commercial mortgages or residential mortgages. The asset allocation decision for this fund is likely to center on our top-down view on the corporate market in general. When we are somewhat defensive on corporate bonds, this strategy is likely to result in some allocation to treasury bonds in small part and, in a larger sense, investments in more defensive names and sectors. Examples of this type of investments might include higher quality names in telecommuncations and media or the consumer noncyclical sector which performs well in times of stress for the corporate market. Conversely, as we become more constructive on corporate bonds, we might increase risk exposure to take advantage of wider spreads that are likely to compress. We measure our risk for corporate bonds with a combination of duration and spread which serves as the best indicator of how much risk we should have with corporate bonds. Thus, to gain a perspective of where we want to be relative to the index, we will simply compare our duration spread number to its level in the index. If we want to be generally overweight, our duration spread number might be 20% larger than the index, and if we want to get underweight, we might try and target 80% of the risk of the index. Q:  What are the risks you focus on and how do you manage them? A : We focus on the overall beta of the portfolio as expressed by duration spread numbers described earlier. The level of this risk we take is definitely driven by our macro view. When we get down to individual issuers, we keep that number in mind, too, but we also look at the duration contribution we have relative to the index for each individual name, thereby directly linking spread movements to performance. We also monitor what our exposure is on a market-weight percentage basis. In a downside scenario, market weight ultimately dictates the level of risk to the portfolio. We e keep an eye on all three of these aspects to make sure that none of them gets too large or too small. Additionally, we are mindful of secondary trading market limitations, because if we start to own close to 10% of any single issue, that could have a bearing our ability to trade.