Q:  What is the history of the loan fund and how is the fund different from its peers? A : The fund was established in April 2001 as the first floating rate loan fund offering 30-day liquidity to its investors. It remains one of the few funds in the market today that provides liquidity on something other than a daily basis. By not offering daily liquidity, the fund is allowed to use leverage to a maximum of 33% of total assets for investment purposes. In stable to rising markets, leverage has been a very effective yield enhancement tool. Currently, the fund is carrying around 15-20% leverage. The fund was capitalized with $200 million at inception and, between years 2003 and 2007, grew quite substantially, peaking at about $2.5 billion. As with all similar portfolios, the fund experienced significant redemptions coinciding with the 2008 financial crises, but has been steadily growing since. Currently, the fund has more than $1 billion in total assets. In short, the fund is unique relative to peers due to its longevity, liquidity structure and use of leverage, and the fact that it is, and has always been, invested in only secured, floating rate loans. We believe that a full position in loans is attractive in today’s market, both from an interest rate (duration) and credit risk perspective. Q:  What is your investment philosophy? A : Our philosophy is to invest with an eye toward loss mitigation and value. We look to outperform by avoiding realized losses related to default activity in addition to positioning loans that offer a better than average risk/return profile. As a result, the fund has, since inception, reflected a generally higher quality bias, as reflected by public ratings from S&P and Moody’s, than the indicative benchmark at any given time. In addition, in order to efficiently create liquidity for investors, the fund also typically invests in larger loans that are more actively traded. Q:  How are floating rate loans are different from high yield bonds? A : One of the big differences lies in how the respective coupons are structured. Unlike fixed rate bonds, the coupon delivered by senior loans is comprised of a credit spread over LIBOR. Historically, the average time in which a change in LIBOR is reflected in the fund’s distribution yield is inside 60 days. As a result, loans have a tendency to maintain their value much better than do bonds in periods of rising rates. And, of course, when rates do move higher, based on that short reset period, investors have historically enjoyed an increasing income stream from loans, unlike a bond with a fixed coupon. From a credit perspective, because both high yield bonds and senior loans are below investment-grade credit risk, there is a greater risk of default than with investment grade bonds. However, senior loans are typically secured by the issuing company’s assets, which results in much higher recoveries – which means lower losses - historically than you would have for high yield bonds. The fund, we would note, invests predominantly in “first lien” loans, which have the highest priority ranking against that collateral. As for value, we view loans as providing an attractive yield at a reasonable price. Loans currently trade around par and consequently, you need not put a lot of capital at risk to gain that yield. High yield bonds, on the other hand, have at recent times, traded has high as 106-108, which can result in capital loss if the value of the bond falls due to interest rate concerns. We should note that loans are structurally less liquid than bonds, meaning they take longer to settle. The target settlement time for loans is seven days, but most trades take about twice that to settle. That is the predominant reason there is a 30-day liquidity structure on the fund. It allows us to stay fully invested in loans instead of carrying higher levels of cash and or securities as is the case with virtually all open-end loan funds currently in the market. The inclusion of other assets into a loan portfolio, be it cash or securities, can materially alter the risk/return profile of that fund. Q:  What is your investment strategy and process? A : Our strategy, replicated across every fund we manage, is to construct sufficiently diversified portfolios of good quality senior loans that offer attractive risk-adjusted yields. Again, what separates us from most of our peers is that singular focus on loans. We also manage from primarily what is referred to as the “private side” of the market, which speaks to the source of the information that we use to invest and risk manage. As a loan only investor - which means we are not also investing in a bond or security from that same issuer, we can legally use material and non-public information such as forward looking statements, projections, budgets, valuations, etc. to evaluate the creditworthiness of an issuer. That is where our process starts. Our investment process is quite rigorous, and very bank-like in nature, executed by a large, experienced team. We regularly review industry sector performance with the goal of identifying and avoiding sectors that may be prone to default activity. Within acceptable industries, we independently analyze every loan we are considering for investment purposes according to our own set of assumptions. We also review, in sufficient detail, the collateral backing the loan, in addition to related loan documents to ensure they contain the necessary protections for secured lenders. Our risk management process requires an updated credit analysis be performed for every portfolio company every 90 days. Q:  How do you view different sectors? A : As noted, our investment process requires a sector review be performed on a quarterly basis, with the objective of identifying risk first, then potential return. Currently, the market feels pretty balanced sector-wise. Right now, the bigger challenge is to identify and navigate the macro environment. That said, one industry we are cautious on would be certain subsets of healthcare vulnerable to the potential impacts of the impending Affordable Care Act, specifically changing Medicare or Medicaid reimbursement. We’re currently neutral, but watchful, on companies in cyclical industries. There are currently no material over-weights within auto, chemical or general manufacturing sectors within the fund at this point. The retailing sector is one area that continues to perform very well. We find attractive our retail exposure due to the market position of the companies in question. Q:  What is your credit risk research process? A : We have an internal credit scoring system, which allows us to consistently measure and manage credit risk through the life of a loan. From a leveraged lending perspective, we look at the same types of metrics as most of our peers, but from an overall investment perspective, we take a deep dive into the underwriting in terms of multiple downside case cash flow scenarios and other qualitative and quantitative measures. Our team is quite selective when it comes to approving credit risk; only about half of the new loans coming to market over the last 10 years have meet our approval criteria. A recent example of a transaction in which we did not participate was an auto parts supplier, both to OEMs and after-market. It is a very well-known name within the market, having been a loan and bond issuer on and off for the last 10 to 15 years. We liked the positioning of the company from a product perspective, but we did not like the overall structure of the loan. It was very “issuer friendly”, meaning it was not only covenant-light, but there were a tremendous amount of so-called “add-backs” to the company’s EBITDA. It had been through bankruptcy a couple of times, and there was a lot of uncertainty within financial data. We passed on the deal, not because we were uncomfortable with the future prospects of the business, but we could not get conformable with the numbers. This has been a consistent theme in terms of our declines over the course of the last one to two years. Another example of a decline rationale is what we call documentation risk. We recently considered a shipping company that had been through a restructuring. Having followed the company through the restructuring, we were generally comfortable with the business risk, the new management team, and certainly the very attractive yield on offer. However, we were considering the first-lien loan, not the second-lien that was part of the capital structure, and the governing documentation was very much favoring the second-lien lenders. So we decided to decline that transaction - based on documentation - not just credit risk. Q:  What is your portfolio construction process? A : We build every portfolio from the bottom up pursuant to a number of key considerations. First, as noted, we eliminate sectors that are unacceptable from a credit perspective. Second, we will filter existing portfolio companies by acceptable credit score, and build portfolios from the bottom up with the best relative value credits available in the market at that time. Throughout the construction process, we remain cognizant of concentration issues/limits and investment guidelines. When it comes to concentration issues, we are very consistent. The average issuer concentration in our portfolio for a 10 year running period has been just under one half of 1%. Average sector concentrations have also been consistent at around 3%. We believe diversification is still the best defense against broad based credit risk. There are currently approximately 300 individual issuers in the fund. Q:  What is your organizational structure to manage these loans? A : There are 46 individuals in our senior loan boutique, including 25 full-time investment professionals. The average experience of our senior investment team is over 15 years. We run our business from an organizational perspective by way of investment committee structure, which consists of three voting members. Below our investment committee are our Team Leaders/Portfolio Managers. We have six -- five in the U.S. and one who manages our team in London. Those individuals are responsible for managing the research analysts on their teams, in addition to credit and sector risk. Most importantly, they also manage on a daily basis one or several of our portfolios, all under the oversight of our investment committee. Q:  Many fund companies have the same team investing in high yield bonds and in bank loans as well? How do you avoid the conflict of interest? A : We are physically and technologically separated from our high yield bond team in Atlanta. The primary reason is we are a private side loan manager, which precludes us from sharing material, non-public information with the high yield group. We have regular communication with the high yield team on sector related and macro issues but do not discuss individual credits. Our loan team has always been a stand-alone boutique even prior to the time of the acquisition by ING in 2000. We have been running our business in a consistent fashion for 13 years. Q:  How do you define and manage risk? A : Risk to us, first and foremost, is defined as loss of principal. Our entire process is built on minimizing loss. To that end, we seek to try and avoid defaults, maximize recoveries, and to position portfolios so they are less subject to market volatility. Given our position as a pure play loan manager, we can focus on the risks inherent to loan management, and not be distracted by risks attendant to managing other asset classes. While we do not invest in bonds, we closely monitor that market as developments in that area can have an impact on loan pricing and loan performance trends.