Q: Could you briefly explain your investment philosophy?
A : The Russell Short Duration Bond Fund is designed to provide risk-managed excess returns over a one- to three-year investment time horizon utilizing a multi-manager approach. The fund utilizes two money managers with different investment strategies and styles that are intended to be complementary.
A key approach to the investment philosophy is risk management. At the money manager level, Russell examines key factors affecting the manager's investment process, including decision making structure, security selection expertise, quantitative sophistication and organizational stability. When managing risk in our funds we monitor many factors, such as sector positioning, spread duration contribution and drivers of tracking error. We do this at both the money manager as well as at the fund-level.
Q: How do you convert your investment philosophy into an investment strategy?
A : Our investment strategy seeks current income and preservation of capital with a focus on short duration securities. The Fund’s benchmark is the Merrill Lynch 1-2.99 Years Treasury Index. The fund invests across a wide spectrum of fixed-income securities, including those issued or guaranteed by the U.S. government, corporate bonds, asset-backed securities secured by various types of collateral (e.g., credit card receivables, mortgages) and non-dollar denominated obligations. We may invest up to 15% of assets in debt securities that are rated below investment grade, or “junk bonds.” In addition, the fund has a significant exposure to mortgage back securities.
The fund defines short duration as a duration ranging from six months to three years. Duration is measured at the fund level. There are no duration restrictions on individual securities.
Q: Who serves as a sub-advisor to the Russell Short Duration Bond Fund?
A : Currently, Fund assets are equally divided between two money managers, PIMCO and Logan Circle Partners, L.P.
PIMCO is a top-down, macroeconomic manager whose investment process is driven by longer-term factors and includes a global perspective. Within this framework, PIMCO identifies what it believes to be relative-value opportunities through a bottom-up process. This combination of top-down, long-term investment horizon and bottom-up security selection is intended to complement the approach of the other manager in the fund.
Logan Circle Partners brings to the fund a bottom-up, issuer specific evaluation approach. Logan Circle believes the markets regularly misprice securities that are exposed to credit, prepayment and liquidity risks. To attempt to capitalize on these inefficiencies and provide investors with an opportunity for excess return, Logan Circle focuses on optimal security selection, emphasizes spread sectors, and constructs portfolios with attractive risk/reward characteristics.
Q: What are the defining features of your research process?
A : The Russell manager research process is highly respected across the industry – not only for the amount of resources that we dedicate to this work but also the experience and expertise that we bring. Across various asset classes, Russell actively monitors approximately 8,000 manager products; last year Russell held more than 5,200 meetings with money managers. Russell internally rates each manager product, considering insights and perspectives related to their investment process.
Russell’s Investment Division is split into two fundamental teams - a dedicated manager research team and a fund/portfolio management team. The research side and the portfolio management side work in tandem to monitor our money managers and to consider fund characteristics - the drivers of underperformance or outperformance, the sources of risk, and where money managers see value going forward in their outlooks and positioning.
We look for active managers that are highly engaged, very knowledgeable and make well thought out decisions. They should have clearly defined, robust investment processes that they adhere to in a disciplined fashion. Finally, they should have a source of insight and perspective that they clearly understand and support as an organization.
Q: How do you do your portfolio construction?
A : Russell uses a multi-asset, multi-style and multi-manager approach to the construction and management of its investment portfolios. Assets are managed by multiple money managers that Russell researches, hires and terminates (subject to Fund Board approval), for funds on an ongoing basis. Russell seeks to combine money managers whose styles are complementary, thus seeking to improve diversification. Using various proprietary factors, we determine which money managers are currently adding value as well as those which may be poised to be additive to fund returns in the future.
The multi-manager approach allows for taking strategic sector or interest rate positions, as well as making investments in areas such as high-yield corporates, emerging market debt and non-U.S. dollar denominated bonds. As always, investors should consider that the multi manager approach in this area is based on sectors of the fixed income market that the money managers believe may be undervalued. The multi manager approach can also increase the Fund's portfolio turnover. The investment styles employed by a Fund's money managers may not be complementary and could be beneficial or detrimental to the Fund.
The weighted average duration for all classes of the Fund as of September 30, 2009 was 2.3 years. The Fund has a shorter-term horizon versus a fund that has an intermediate or long term mandate. For this Fund we are always going to look at the nearer term, meaning, where things are going to be next year or over the next several quarters.
Q: What risks do you perceive in the portfolio and how do you manage them?
A : Russell’s process is oriented towards identifying money managers and combining them into investment strategies that have the potential to generate excess returns and sustainable performance over a business or interest rate cycle. As such, assessments of the stability and robustness of the money managers’ investment professionals, processes, and quantitative tools are an integral part of our portfolio management.
There is no doubt that delivering on return expectations remains a primary objective of money managers. Recent market and active management experience, however, has clearly reiterated the need for a renewed and sustained focus on risk management.
An overriding theme for our risk control is our investment guidelines for the Fund’s money managers. As part of the investment mandate given to Fund money managers, we set risk guidelines across several factors, including credit quality, duration, currency exposure, and certain types of securities, which would include total return swaps or collateralized debt obligations.
This discussion leads to one of the key risk controls that we have in place for the management of portfolios. Russell has systems in place that allow us to monitor at the fund level, the manager level – and even down to the security level, the sector positionings in the funds in terms of market value, what's contributing to duration and yield in the portfolios as well as what is contributing to spread duration in the portfolios or what are the sensitivities of the various changes in spread sectors.
We look at tracking error as well, or the difference between the Fund’s return and that of a specified benchmark. We look at decomposition of tracking error, and what's really contributing to the variation of returns around the benchmark. What we are doing is assessing what is driving tracking error, which money managers are contributing to (tracking error) risk in which sectors and to what magnitude. On top of this we overlay our assumptions of the markets and the economy, and try to make a determination about what is appropriate.
Q: How do you determine the number of managers in your fund?
A : Well, that's driven in part by the level of assets in the fund. This Fund has approximately $555 million in assets as of September 30, 2009, and if it grows or shrinks materially, we would want to right-size the number of money managers. Another reason to considering adding managers is to see how another money manager would fit with the investment approaches of the existing managers. We look at how manager returns are correlated with one another, and how much and what type of diversification a new manager would potentially bring, for example, what sort of diversification a new money manager could bring in terms of top-down versus bottom-up strategy.
Q: How often do you change managers in your fund?
A : There really is no set answer to that question. This is where the resources Russell employs to monitor managers plays a critical role. The markets can change, a manager’s investment approach can change or a member of the money manager’s key personnel might leave, potentially impacting intellectual capital .Any one or more of these factors can lead to a manager change in a Fund.
[Q: Are there any specific characteristics related to the success or the lack of success of the Fund's underlying managers?
A : We are focused on the managers and the organization and investment process supporting these individuals. Our analysts hold thousands of research meetings annually — many of which are face-to-face to study and evaluate each manager's quantitative and qualitative characteristics.
We are assessing a money manager based on the depth, breadth and the intellectual capital that they have in bringing to the overall investment process. It is three things - the skill, expertise and experience of the individual manager or investor team, the sophistication and robustness of the firm’s investment process and then, the overall organizational stability that result in our assessment of a money manager.
{{Fund objectives, risks, charges and expenses should be carefully considered before investing. A prospectus containing this and other important information can be obtained by calling (800) 787-7354 or visiting www.russell.com. Please read the prospectus carefully before investing.}}
{{Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages.
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
Securities products and services offered through Russell Financial Services, Inc., member FINRA, part of Russell Investments.}}
