Q:  What is the history and objective of the fund? A : Thornburg Investment Management is a privately held investment management company based in Santa Fe, New Mexico. The firm manages seven equity funds, nine bond funds, and separate portfolios for select institutions and individuals. The Thornburg Limited Term Income Fund was established on October 1, 1992 and I have served as one of its portfolio managers since 2010. The fund is designed to generate income and to be a core part of the portfolio of investors looking for less volatility compared to other income generating bond funds. Q:  What are the main principles of your investment philosophy? A : At Thornburg, we have an overriding philosophy that can be summed up as “go where the value is.” Also, when Thornburg creates funds we try to have flexible mandates for the managers. We believe that in the end security selection is the core of what we do, and the thorough research of companies and bonds drives our investment process. In other words, we are bottom-up driven and less influenced by any top-down or macro-economic views. Our thesis on what is going on in the U.S. and global macroeconomic environments obviously plays towards our view of interest rates and how credit spreads might react, but the dominant approach for us is to do fundamental bottom-up analysis. The philosophy behind this fund is also rooted in three primary objectives. First, we are trying to give our shareholders the highest possible income that is consistent with capital preservation. Also, we are trying to keep our net asset value as stable as possible. Lastly, since we view this fund as a core part of someone’s portfolio, we try to deliver a product that has low to negative correlation with equities over a business cycle. Q:  Where do you typically look for opportunities? A : We invest in all categories of bonds from government securities of the U.S. and other countries issued in U.S. dollars, U.S. government agency bonds, structured products including mortgage backed securities, credit card loan portfolios and auto loans and corporate bonds. Currently, corporate bonds is the largest component of our fund, as much as 60% of the fund because we believe that if we do the fundamental analysis correctly, we think we can limit the ultimate risk of default to a large degree. Moreover, corporations in the last few years have focused on improving balance sheets and now have the strongest balance sheets in years. Q:  What is your investment strategy? A : We implement our philosophy as a team of global generalists. Not only does that allow us to make good fundamental analytical decisions based on a particular company’s credit worthiness, but it also helps us assess the relative risk-reward paradigm across different securities. It is important to note that we do not have any mandate that says a portfolio has to be structured in a certain way. As long as the portfolio meets our three objectives and philosophy we can invest or decide against participating in any given market. For example, in the U.S. corporate bond market, any security rated ‘A’ or higher is not exciting from a yield and credit spread standpoint currently. So, we are principally not adding any new holdings of that type to our portfolio. What we do instead is focus on some structured products, government agency mortgages and BBB corporate bonds for our incremental purchase opportunities. We have limitations on how much BBB we can buy. Sixty-five percent of the fund assets have to be in securities rated ‘A’ or higher, so we have a limit of 35% in BBB rated or high yield bonds. We can hold on to bonds that have fallen in rating, or as they are called “fallen angels”, but we do not add to them. The bonds we purchase have to be investment grade. We probably have been sitting somewhere between 30% and 35% in BBBs over the last couple of years because that is where we found value and continue to see it that way today. Q:  How is your strategy going to change when rates begin to rise? A : Presently, we are in a historic low interest rate environment in the U.S. Looking at the marketplace we would suggest that, over time, it will be more likely than not that we will have a significant movement upward in interest rates, and that will cause a loss at least in the temporary sense. In this fund, we have a 10-year laddered portfolio. It is an active ladder in the sense that we have enough flexibility to demonstrate or implement what we have developed as our interest rate outlook, and currently we are keeping duration shorter than a passive ladder would suggest Because we have moved the fund more into BBB corporate bonds over the last couple of years, we are prepared to take risks on the bonds of companies that have successfully weathered the recession by cutting costs and managing to keep low debts on their balance sheets; rather than increasing yield by increasing duration. What is more, they are still generating a lot of cash because of their good margins and lean cost structures, even though the economy is not growing. They have also reworked their debt maturities so that they do not have a lot of bonds coming due in the next two or three years. We view that as a pretty interesting risk-reward opportunity relative to our investment set. Q:  Would you describe your research process? A : While reviewing research ideas presented to us, we seek to find attractive bonds either due to the nature of a company’s business model or because of its position in the context of the global economy. We structure ourselves in a way that we can execute this across many sectors and the whole rating spectrum as allowed by a given fund. At the end of the day, we are all sitting together and continually talking not only to understand the fundamentals, but also to get a good sense of where these bonds are trading compared to other sectors and asset classes in the marketplace so that we can make better judgment of their relative value. Q:  Could you give some examples to illustrate your research process? A : The first example would be one of the first new issues coming out of the financial crisis. National Rural Utilities Cooperative Finance Corporation is a leader in providing financial products to America's rural electric cooperative network. When that National Rural Utilities Coop lends money to those smaller utilities, they get a first mortgage in those utility assets. In our view, first mortgage utility bonds are about the best bonds we can buy from a fundamental standpoint. Although it is an ‘A’ rated company, the bond was issued at quite a discount, 10.5% yield. We took the time to do the bottom-up analysis in order to identify the underlying risks. We wanted to understand whether it was really investing in utility assets that we had a first mortgage claim on or just the convoluted financial structure that the market was suggesting it was. Overall, we thought that the name made a lot of sense for our portfolio. A more recent example would be Eni S.p.A., the Italy-based oil and gas explorer. As a well-diversified company, Eni goes beyond exploring and developing oil and gas reserves with its refining and marketing operations in Italy. It is true that they had some issues with the Libyan oil field, and some of their other riskier places, but their exploration and production assets continue to generate a lot of operating income and cash flows. And though their refining, marketing operations have not been doing so well because they are Italy and European centric, the overall business is still quite decent. Moreover, Eni has been trading quite wide relative to anything that we may remotely consider its peer in terms of global exploration and production companies. Looking at the company’s operations and cash flows, we still view them as a nice ‘A’ rated company. Even if the bond were downgraded to BBB, likely, we would still view it as an ‘A’ rated credit, and we are currently getting good compensation in terms of credit spread, which is somewhere in the mid-200s for a 8- or 9-year bond. We certainly understand the risks surrounding European sovereigns, and in particular Greece, Spain, Italy and Ireland, but looking at the corporation, they are still generating a lot of cash flow internally. As a result, we think that even if they need to refinance debt, they might have to pay a little more than they might otherwise want to, but fundamentally we view it as a good credit opportunity for our portfolio. It always gets down to the individual story and risk-reward opportunity embedded in a given security. Q:  How do you build your portfolio? A : We tend to have between 300 to 400 individual securities in the portfolio to achieve the kind of diversification that we like to maintain. In fixed income investing, there is a great deal of asymmetric risk-reward inherent in the asset class. Given that asymmetry of risk, we think diversification is an important way to help manage the risk of credit default in a portfolio. Most of our positions are small in terms of percentage. We have anywhere from a 0.1% position in the fund to a couple of names with full 1% positions. The Barclays Capital U.S. Intermediate Government/Credit Bond Index is our benchmark; however, we like to say we are benchmark aware, but benchmark agnostic, when it comes to building and managing our portfolio Q:  How do you manage risk in the portfolio? A : In terms of investment grade fixed income, we first look at interest rate risk and we make sure to remain cognizant of the duration of the fund and the individual securities. We use a 10 year ladder to manage that risk. Adhering to this approach also means that we are always having bonds mature as they roll down the ladder so that whatever the interest rate environment is, we can take that new money coming out of bonds and reinvest it at current market rates. That could average the overall yield of the portfolio up in a rising rate environment, or it could also bring it down. We have decided over time to take on credit risk as well. While interest risk will mostly cause a temporary loss, credit risk can obviously lead to default, and eventually to a permanent loss. Should we take a lot of permanent losses, we know that it would be very hard to “come back” in fixed income, particularly in the investment grade area. In today’s environment of historic low rates the coupon component of a bond is not much of a buffer for credit mistakes and other price movements. And so, diversification is key.