Q:  What is the history of the fund? A : The floating rate high income fund was launched in 2006 and the fund invests in senior secured bank loans (minimum of 80%) and restricts other investments, including cash and high yield bonds to less than 20%. We have a deep and competent high yield investing team here so we leverage their best ideas as well. It also acts as a cushion in the event of fund outflows in that we can sell bonds easily compared to loans, which can take as longer to settle. As of June 30, 2013 the fund had about $6.65 billion. We have a very liquid strategy. We do have a separate bond strategy with its own mutual funds. Q:  What are key differences between high yield bonds and bank loans? A : The key difference is the floating rate aspect. In the last two months when interest rates rose dramatically, bonds went from year-to-date gain of 5% to losses at one point, because bonds have longer duration than loans. Loans typically will reset at three month intervals so rate hikes are not such a concern. The companies that issue loans are the same companies that issue unsecured high yield bonds as well. But the difference with senior secured loans, as the name implies, is that you are secured by the company’s assets so in the event of downside you have better protection, you have first claim on a company’s assets, and if the company were to file for bankruptcy the senior secured debt needs to be addressed first before anyone else gets a penny. From a credit perspective, there are not many differences among companies because the same companies are issuing bonds and loans. A cable operator like Charter Communications and hospital chain operator HCA have bonds and loans. There are some small companies that may have just bonds or just loans, but the majority of the mid and large high yield companies issue both senior secured loans as well as bonds. We think of senior secured loans as similar to a mortgage. If you want to prepay your mortgage because you want to refinance, or you do not want debt anymore, you can just go to your bank and prepay at par, or 100 cents on the dollar. There are some loans that have call protection so you might get out at a higher price or a slight premium but for the most part a loan has very limited upside, whereas a bond is typically not callable for the first three, four, or five years. If it is callable it is usually at half the coupon. Q:  What is your research and investment organization structure? A : We differentiate ourselves firstly with our research group. It is a bottom up driven research process. We have a seasoned group of professionals with an average of 15 years of experience per analyst and most analysts have been with us since 2002. Earlier this year we have added to the group and we are going to add one more. Although we continue to grow the group it is a disciplined process. We protect our clients as much as we can on the downside. We are quick to admit if we make credit mistakes in selecting credits and not averse to sell quickly as well. Loans only have a point or two of theoretical upside and it does have a full theoretical 100% downside so it is a skewed upside-downside ratio. We have a team of eight analysts and portfolio managers, with one more to be hired shortly. The managers here do have analyst responsibilities. They do not have as many companies to follow but, for example, I cover telecom and cable industries. Some of our analysts have 30 years of experience, others have 10 to 12; but it is a very seasoned bench. We like to say we hire people after they have made their mistakes elsewhere. Almost everyone here has worked at really large firms and they are looking for a more flat organizational structure, no memo writing and a very entrepreneurial culture. There is nowhere to hide. We are all in a little corner here on the floor with a trading desk in the middle and analysts all around. We have a very lively daily discussion. We have morning meetings every day to discuss any salient news, including earnings, et cetera. If news breaks out an hour after our morning meeting that does not mean it waits until the next day. The analyst will just pop out of their office and go to the manager and give us the information. One of the benefits of our size is that we do get access to the Wall Street brokers and we get good allocations. We also get meetings with management teams and several of them visit our offices for one-on-one meetings. Q:  What is your investment strategy and process? A : Our investment process focuses on five key investment tenets: asset coverage, free cash flow generation, liquidity, management team and competitive position. First and foremost we look at asset coverage. That is what ultimately protects you on the downside. We look at free cash flow generation. Is the company generating or on the path to generating free cash? We look at liquidity, whether you are looking at a really bad year like 2008, or in a good year like 2012 when liquidity was wide open. We are always looking at a company’s debt schedule to see what debt is due in the next 12 to 18 months. If there are upcoming maturities that ultimately need to be addressed, can the company tap the capital markets to address it? Do they have access to a revolver? Is there a lot of cash on the balance sheet? Can they issue a bond or convert or equity to address it? If we answer no to that question that is probably a name we are going to stay away from. We look at a company’s management team, and look for a team that has a balanced approach to both their debt and equity holders. We look at a company’s competitive position. The question we ask is whether the company has a reason to exist? We recognize that high yield companies compete against investment-grade companies who have more resources and deeper pockets. There are great companies that have niches in their market and can operate very well. A good example would be a cable company. Investment-grade cable companies do not compete against high yield cable companies because by law they operate in their own areas. They do not compete against each other. Time Warner Cable or Comcast have their geographic locations and then Cablevision and Charter and Mediacom have their locations. They only compete against satellite or select telecom companies. In essence, it is a duopoly or oligopoly. Q:  What is your research process and what you look for in covenants? A : A few things we typically focus on before we get into our investment tenets would be looking at the underlying issuer, looking at who is the underwriter for the deal, and we will typically stay away from what we call “middle-market” deals. Middle-market loans tend to be companies with $50 million or less of EBITDA. Once we put it through our investment process, if it meets the five criteria, then the next step is looking at the covenants. Our analysts do a very good job of reviewing covenants of a loan, but to the extent they need additional clarification, we do have in-house counsel as well. Once we get past that we do a relative value analysis. That is looking at where on the capital structure we want to be. Sometimes a company will issue first lien and second lien. Sometimes they will issue a term loan A, or a term loan B, or maybe a second lien. Sometimes we will play first and second, sometimes second only, sometimes first only. Sometimes the company will just issue one security so there is not much relative value to deal with – it becomes a question of whether we like it or not. Then we bring it to committee. That consists of all the portfolio managers, an analyst presenting, and we invite other analysts as well. It is a very lively discussion and if the analyst and PMs are all in agreement we will then move to put that name in the portfolio. Q:  What is your portfolio construction process? A : It is bottom up driven. If we are overweight in one sector versus another sector, it is an output of our investment process, not a top down view. If you look at the portfolio and where you are overweight and underweight, not surprisingly we are overweight sectors that we believe lend themselves to better asset coverage and better free cash flow characteristics. For example, we are overweight in hospitals, energy, cable, broadcasting, and telecom and underweight in food service, consumer products, and services. A lot of times you look at a balance sheet and 70% or 80% of your assets could be intangibles to the extent you could be looking at a very poor outcome in bankruptcy or a stressed scenario. Our benchmark is the Credit Suisse Institutional Leverage Loan Index. We are totally unlevered. Q:  How do you define and manage risk? A : We do have a separate group that monitors our risk. They are an independent group outside the high yield group. They monitor the portfolio for many risk metrics, including maximum issue size, industry exposures, and other relevant metrics. We have limits on industry, on issuer, on what we can own in anything but senior secured loans.