Q:  What are senior secured loans? Why do you prefer investing in them? A : Senior secured loans are floating rate obligations of corporate issuers that are subject to a credit agreement; in other words they are commercial loans. Loans are an inherently risk-averse instrument in a few ways. One, they are risk averse as it relates to rates. Due to the floating rate nature of loans, the asset class offers protection relative to the duration risk that investors have in their fixed income portfolios. Moreover, the recovery rate historically for loans is materially superior to the high yield bond market. Therefore, if the economy declines again and we start to see company fundamentals deteriorate, loans tend to offer much better protection than high yield bonds in the event of a problem with a given credit. Q:  What is the general maturity period of a loan? A : A typical stated loan maturity is in the six- to eight-year range, which means it is somewhat shorter than a typical high yield bond. The main difference, however, comes as a result of the fact that loans do not have any hard call protection. They are typically prepayable by the borrower at any time. We say that loans usually have a 24-month to a 36-month lifecycle to an event ,typically a refinancing. The duration on this asset class is typically less than half a year. Q:  What is the investment philosophy guiding this fund? A : The Credit Suisse Floating Rate High Income Fund looks to generate attractive risk-adjusted returns by investing primarily in senior secured loans of non-investment grade U.S. corporations. At least 80% of the fund will be invested in the loan asset class and the remainder of the fund will be in other credit risk assets, primarily high yield. Our investment philosophy is driven by focusing on credit and relative value from an implementation standpoint. Q:  How do you transform this philosophy into an investment strategy? A : The fund seeks to generate outperformance against its benchmark, the Credit Suisse Leveraged Loan Index, by investing in a diversified portfolio consisting primarily of senior secured loans to non-investment grade companies. Loans are inherently risk averse so the investment philosophy that we pursue is grounded in the defensive nature of the asset class, particularly defensive against rate increases and credit deterioration. Our goal is to drive the fund’s return through superior security selection and prudent diversification as primary drivers of loss minimization. Another key factor that we take into consideration is relative value. Our analysts are working within their sectors of expertise to determine the risk return for various debt instruments issued by an individual borrower, as well as how those investments compare to other opportunities in the same sector. The mantra that we have consistently pursued is to beat the benchmark with less risk and volatility, and we have succeeded in managing this way through multiple credit cycles. The ultimate inclusion of a name in the portfolio is based on in-depth fundamental credit analysis prepared by our analyst team of 16 sector specialists and the subsequent discussions with senior portfolio managers, traders and myself. Q:  What are some of the analytical steps that your research process involves? A : The first step in the process is to maximize the opportunity set. Broadly speaking, we look at the primary benchmark, the Credit Suisse Leveraged Loan Index, which for U.S. issuers is approximately 1,600 issuers , and the Credit Suisse European Leveraged Loan Index, which adds another 300 names. In the end we have close to 2,000 potential opportunities. Since our overall credit platform is primarily institutional we are generally not beholden to significant market driven funds flows. We believe we have a more selective process because we are not subject to the velocity of retail flows to the same degree as a percentage of our total assets under management as many of our peers offering this strategy in mutual fund format. We meet on a daily basis with all of our analysts to review both primary and secondary market opportunities. Naturally, our focus will vary with time and we tend to migrate with the market to stay on top of where the value proposition is. An analyst responsible for a particular name prepares a standardized write-up. They seek to capture the key elements of the deal including sources and uses, pro forma capitalization, summary of financial covenants, the merits of the business, and any concerns around the operation among other factors. In addition, we do our own proprietary modeling in an effort to evaluate how a certain company will do under multiple scenarios before we can arrive at final decision to include a position in the portfolio. As part of this process, we spend a lot of time looking at historical cash flows and capabilities of companies, which is a key element of our decision making process. In addition we factor in the downside analysis of companies and merger and acquisition comparables within sectors to see how we may be protected in a downside scenario. Once our Credit Committee has gone through this dialogue with our analysts and decides to add a name to the portfolio, it is the analyst’s primary responsibility for ongoing monitoring of the position. As a further step in our process, our portfolio management system generates a watchlist based on price movements relative to the original purchase price. We also sit down on a monthly basis with the Firm’s risk team with efforts directed at deconstructing performance; validating where alpha is being generated, (e.g. security selection or sector selection); as well as monitoring dispersion and performance across all the different product categories. We like to see closely bound performance because we think that it reflects well in terms of the overall risk allocation strategy across the portfolios. In addition to this constant monitoring, we also sit down with our analysts on a quarterly basis for a thorough review of names within their sectors and macro trends that might be at work in terms of overall sector outlooks. During these sessions our analysts are expected to express a buy, sell or hold rating on every position. If our analysts identify through a management meeting or through alternative means a point of view that suggests there could be any credit deterioration, we will consider leaving the position. While we do not have formal stop loss triggers, either on the upside or the downside, we do have a variety of elements to our process that keep forcing the issue around price variability and around performance, aiding us in our effort to capture value when we believe it is fully obtained and to avoid the losses on the downside. We will also reconvene our credit committee and evaluate the possibility of potentially adding to a position in certain instances of significant price movements. Q:  How are your analyst groups organized? A : Our analysts are primarily organized along industry sectors. Analysts are typically organized to follow two industry sectors because we feel it is much more important to minimize the number of sectors they cover rather than the number of names. Q:  How do you go about looking at the overall broad market? A : Since we want to maximize the risk-adjusted return, we may not necessarily have the highest yield at any point in time, but over time we want to generate benchmark beating returns with less volatility than the benchmark. We tend to avoid sectors we view as in secular decline, where there is a high potential of default or, there are historically low recovery rates in the event of defaults. For instance, healthcare has remained a generally safe sector in our view. In addition one area that has a general uptick in terms of our sector allocations would be the electronics sector. While we construct portfolios on a fundamental, name by name basis, we are benchmark aware. We keep close track of those names or sectors that might be underweight or overweight to the benchmark, which helps us decide whether we want to add or subtract from a position. To sum up, we do think about the macro factors on a permanent basis but it tends to be in the context of names that we are evaluating. Q:  How do you build the portfolio? A : Typically, the top 10 names would represent about 10-15% of the portfolio. We start with 120 to 150 names and the portfolio currently has about 250 issuers. As of this moment, the top 10 holdings of the fund represent just over 7% of our overall exposure. Because of the prepayability of loans, portfolios tend to migrate upwards over time in terms of individual holdings. Q:  What is your sell discipline? A : We will consider selling holdings that we believe have become overbought. This is an opportunistic component on the sell side as it relates to trading out of names that we fundamentally like but that might have moved up. As far as credit deterioration is concerned, if we see fundamental credit deterioration from our entry point, we will sell as long as we feel we can invest into another name in the market with a better outlook. Q:  What kinds of risk do you focus on and how do you mitigate them in the portfolio? A : The principal risk in the portfolio is credit risk which can result in a loss of principal. We manage that with the help of our security selection process and diversification. Another serious challenge from a risk perspective is fraud, which can be extremely hard to detect. The only way we can minimize the impact of fraud is by not having overly concentrated positions. Again, prudent diversification is what we strive for. We do not want to buy the market or mirror the index; we want to add value in the process through our security selection. Working closely with our risk department, we take advantage of Risk Metrics and review sensitivity analysis of possible negative scenarios. For example, we can assess how our portfolio should react if the subprime crisis or October 1987 were to hit again. We meet management teams regularly, which adds another layer of protection in addition to diversification and the controls embedded in the construction of our portfolio.