Q:  What is the history of the company? A : Rainier's roots extend back to 1973 through predecessor organizations. Five partners started working together in 1986 as principals at Rainier Bank. The firm became independent in 1991 and has served as the subadvisor for the Rainier Investment Management Mutual Funds since 1994. In 2007, Rainier opened a second office in New York City in response to a growing client base within the Eastern US. As we matured from being a regional to nationally recognized firm, many of our new clients over the last few years have been located outside the Pacific Northwest. The New York office is used to better serve clients by providing access to client service professionals. In addition to relevant portfolio management experience, Rainier is experienced in serving a wide range of clients including institutional investors, corporate retirement plans, independent broker/dealers and RIA’s. Q:  What are the benefits of high yield investing? A : Currently, investing in high yield is attractive because of the additional yield and total return potential. From a risk profile standpoint, in the current interest rate environment high yield is attractive given the excess yield or spread risk premium it can offer relative to Treasuries or investment grade bonds. For instance, if the economy begins to do better, the companies that issue high yield bonds are likely to improve their ability to repay their debt, which leads to better valuation of these bonds. The benefit of an improving economic cycle is that it leads to better returns for high yield bonds, something we cannot say for sovereign bonds or investment grade bonds given the greater proportion of interest rate risk. Q:  Would you highlight the core beliefs behind your investment philosophy? A : We emphasize yield and quality of the issuer to maximize long term risk-adjusted returns in the fund. By concentrating on higher quality high yield bonds that have ratings of B or BB, we minimize the downside volatility in any macroeconomic environment. We take a full business cycle approach as we seek to outperform the broader market over time. In an upside market we aim at index-like returns, and in a down market we look to significantly outperform the index. Q:  How do you convert this philosophy into an investment process? A : The cornerstone of our investment process is the intensive fundamental credit analysis that we conduct to identify issuers with improving trends, strong liquidity and cash flow, and access to capital. This rigorous process has four components to it - idea generation, research and analysis, portfolio construction and monitoring and risk control. As a starting point, our idea generation is driven by quantitative screening of new issuers in the high yield market. We screen such potential investment opportunities based on spread valuations, sector or maturity, in order to provide a list of candidates for in-depth research and analysis. Next, we review corporate events like earnings, mergers and acquisitions or spin-offs that could lead to mispricing and relative value opportunities. Once we have identified an issuer with potential from a fundamental credit perspective, we move on to the valuation phase. After narrowing the selection of companies with good business fundamentals, improving cash flows and catalysts in place to improve their credit profile, we start taking a closer examination of these companies to build our portfolio. What we employ is a bottom-up portfolio construction process that reviews one company at a time. Although we are benchmark aware, we do not allocate funds based on sector weights that are in the index. For example, right now, we are significantly overweight in energy and telecom sectors and we do not own any companies in the financial sector. Based on our fundamental analysis of the macro environment, we will tweak the weightings over time so that we may be more defensive or aggressive based on the valuations of different high yield bonds on the ratings ladder. If we have a strong view on the economic momentum, we will not be hesitant to increase our exposure to lower rated bonds, meaning we are not always restricted to higher quality of bonds. For us, it is relative value that always matters. Our maximum issuer limit in the portfolio of 5%. We are not always driven by the quantitative aspects of investing and do focus on several qualitative aspects as part of our process. The qualitative aspect really comes down to being able to trust management, especially that of a high yield issuer. Above all, we want to make sure management executes what they say. We certainly do not want to be surprised by a company that suddenly undertakes a transformational acquisition or re-leveraging of its balance sheet to buy back stock, which would be a negative factor from a fixed income return perspective. As far as risk control is concerned, we search for companies that have the ability to generate consistent free cash flow over time. In our view, that is where the deleveraging, outperformance and downside risk protection is likely to come from. If a company can generate free cash flow, we feel confident that it is going to be able to not only improve its credit profile over time but will also lead to lower spreads. Furthermore, we also scrutinize the revenue and margin trends. Generally speaking, we want to be certain that all the companies in the portfolio have adequate sources of liquidity to address refinancing risk either through cash on the balance sheet or with the help of a significant untapped credit revolver. We need to have the confidence they have sources of liquidity to ensure that they can survive a period in which they cannot access the capital markets. Q:  Would you give a few examples to better illustrate your investment process? A : An example of a company that is representative of the type of credit that we look for is HealthSouth Corporation. It is the owner and operator of inpatient rehabilitative hospitals. Although it never filed for bankruptcy protection, the company’s credit profile deteriorated significantly following the corporate accounting scandal in 2002. Richard Scrushy, who was Chairman and CEO of the company at the time, ended up in jail. Consequently, the company’s management team was replaced. The company also restructured its operations with more emphasis on the inpatient rehabilitative market, focusing on patients that spend an average time of 15 days in hospital. Not only have they done well with the rehabilitative work, but they have generally emerged as a leader in most markets in the Southeast that they operate in. As a significant part of the company’s revenues is from the Medicare program, those reimbursements are likely to be cut in the longer term, which poses a threat to their current revenue stream. Being aware of this risk, the company has been very conservative in reducing debt and opportunistic in the way that they are expanding the business through partnerships, acquisitions of small providers, and even doing some new hospital construction on their own. Looking at the total picture, we can see some uncertainty due to the budget cuts, but we also have a management team that has done so much over the last few years to restructure the company and to be competitive going forward to define a market that they can defend. What is more, when we looked at the growth potential of the business, management’s strategy and the positive actions that management had taken to date to improve the credit profile of the company, this gave us confidence that they would deliver on their commitments. Additionally, they recently pre-released earnings and raised their guidance, and that was again something that increased our confidence in management. Another example is ArcelorMittal S.A., the global steel company. Their stock valuations got choppy and deteriorated over the last few years and the company’s bonds that were once rated A and are now rated BBB. ArcelorMittal is an example of how we will look outside the high yield market as valuations become compressed and minimize the potential downside while increasing the yield of the portfolio. The company is the world’s largest steel company with operations in North America, Europe, Latin America and Asia. Management has shown a willingness to issue equity to maintain their credit rating and access to capital markets. In addition to that, they have been disciplined in terms of how they allocate their capital. Even though they suffer from a lot of the steel mills that need substantial investments, their operations are vertically integrated, which mitigates some of that risk. Furthermore, they have made a big push into iron ore mine acquisitions so that they can increase integration and control cost structure to their advantage. In our view, the company’s asset base provides a lot of resources that they could tap if they needed to sell assets. This strength in their physical assets provides a degree of comfort and security that we generally do not find in the financial sector, where there are no physical assets to bank on in difficult times. Q:  How do you build your portfolio? A : We strive to have a diversified portfolio across industries and issuers. Presently, the portfolio has bonds from 70 different issuers. We have a maximum issuer limit in the portfolio of 5% and limit the aggregate exposure to all CCC rated issuers to 10% of the portfolio. We lean toward companies that have verifiable assets or physical resources with immediate market value. This category includes telecom or natural resource companies in the mining, steel, or energy sector, where there are a lot of assets that could be tapped if a company should suffer from a liquidity crunch. That said, we generally avoid companies in the financial sector. Such companies typically do not have any options to supplement liquidity. Moreover, companies in the financial sector generally require access to low cost capital to make a margin in the financial businesses, and when they can, they enjoy investment grade rating rather than high yield rating. Our benchmark is the Bank of America-Merrill Lynch High Yield Master II Index. Q:  What is your sell discipline? A : We sell a security for a few reasons. First, we will sell when an issuer misses quarterly performance expectations consistently, which has a negative effect on the credit profile. Also, we will sell when we lose trust in management’s ability to follow the promised business plan. Q:  How do you define risks and what do you do to contain them? A : Our primary risk is the credit risk associated with the individual issuer. Secondarily, we also have the macro risk associated with interest rates and the economic cycle. Our focus on company fundamentals, management’s ability to follow through and valuation are essential to mitigating risks in the portfolio. In our bond selection we are driven by relative value where we are compensated appropriately for taking additional risks. We are willing to go up and down the risk ladder depending upon where the value is and we are not wedded to a bond rating. In certain situations, we will invest only in the senior secured bonds of the issuer to mitigate our risk profile.