Q:  What is the objective of the fund? A : The objective of the fund is to maximize total return through capital appreciation and current income. Our fund can be best described as one with medium duration with a diversified multi-sector fixed income approach, measured against the Barclays Aggregate Index. We like to build a diversified portfolio, emphasizing sectors that mirror our macro view, and overweighting the bonds we have researched from fundamental perspectives and that meet our risk criteria. Q:  What are the underlying principles of your investment philosophy? A : Looking at the status of the market and the global economy, we like to find sectors, companies and securities that are expected to thrive in the economic environment that we are in. In other words, we like to match both our top-down and bottom-up view. We spend a lot of time understanding the macro environment - thinking about what is happening in the global economy over the near and intermediate term and how that will impact various segments of the fixed income market.  We use the bottom up research within the sector teams to help identify the best bonds within those sectors best suited for our macro view, In addition to that, we believe that sticking to the valuation is important. That is how we look at the yields on various securities and along the interest rate curve.  A big part of our investment process in choosing securities is related to value. The portfolios largest weightings are where the sector and bonds fit our view, and the value is also most attractive.  We also understand the value of diversification and we like to have a diversified portfolio. Finally, another tenet of our philosophy is our belief in risk management, which tends to be a key to the long-term outperformance.  Fixed income investors tend to care about principal protection.   Therefore, it is important to understand the downside of any investment first and foremost. Q:  What are the advantages of investing in an intermediate term bond fund? A : First of all, it is a great way to get exposure to the fixed income market. Many of our investors may or may not have a single sector exposure and our fund offers a broad basket of both U.S. and non-U.S. fixed income securities from which to choose from. We have specialized investment teams in different single-sector market segments including emerging markets, investment grade, high yield bonds and mortgages.   Those teams provide best ideas for portfolios like this and we feel this is a great way for an investor to get exposure to all those markets. Additionally, we offer flexibility to take advantage of different durations in different market environments so that we can take advantage of lower or higher rates depending upon our views. Q:  How do you generate alpha compared to your benchmark? A : In order of importance, sector rotation, security selection, currency, and yield curve and duration, are some of the strategies that we employ to add alpha. However, the two main drivers are picking good securities and sectors together with figuring out with precision when to be in and out of specific sectors. In our view, sector rotation is a key source of alpha generation. Q:  How do you carry out your sector rotation and security selection? A : Our security or credit selection starts with the macro perspective – what is our view of the world, what is driving volatility and what is our view on the global growth outlook? We combine this outlook with our econometric model sector valuations, and fundamental views to see where yields on various sectors trade and how that compares to historical trends. Finally, we look to the sector teams for the best ideas within the sectors that fit the risk tolerance of the portfolio. For instance, if we are ready to increase our exposure to corporate bonds we would go to our credit team to find out what they like and how valuations look in the sector. If the credit team likes the banking sector because credit is improving and spreads and yields are attractive, we will end up with an overweight in banks and select securities in the sector that match our views on the broader market and sectors. Q:  How do you build a consistent investment strategy around your philosophy? A : The fund normally invests at least 80% of its assets in fixed-income securities including U.S. Treasury, bonds issued by the government agencies, mortgage backed securities, investment grade corporate bonds, commercial mortgages, and asset-backed segment. While the fund focuses primarily on U.S. securities, it may invest up to 30% of its total assets in fixed-income securities of foreign issuers, including issuers in emerging markets, and up to 20% of its assets in fixed-income securities rated below investment grade or high yield bonds. We use the Barclays U.S. Aggregate Index as the fund’s benchmark. Historically, beating the benchmark is our primary objective.    After a great tailwind in the fixed income market with rates falling sharply in the last decade and Treasuries trading at historic rates unseen over the past four decades, we have started to think more and more about absolute total return. Even though the benchmark is always going to be part of our focus, we might move a little more away from the index if and when we get concerned about rising rates. In such periods we would be looking for a little more absolute return.   Q:  What analytical steps does your research process involve? A : We start with the view on the economy and develop scenarios with the help of macro research committee. In our monthly strategy meetings we go through these scenarios in order to evaluate the probability of various outcomes. As part of our research process, we have built proprietary models running across all of the fixed income markets and calculating valuation historically with the help of several variables. After applying our scenario to the models, we come up with a view that is debated and analyzed in more detail at our multi-sector committee meeting, where we identify the sectors our portfolio most wants to emphasize.  Based on the decisions from the meeting, we prioritize sector weights as we prepare to increase or decrease the allocation in line with market valuation changes. Q:  What is your buy-and-sell discipline? A : Our buy-and-sell discipline is based on three elements – our macro view, our underlying credit view, and the individual security valuation. For example, because we like banks, we overweight investment grade U.S. banks. We think the value and the credit are good in the space. Furthermore, the spreads and the yield are attractive compared to Treasuries and other investment grade credit, and on top of that the credits are improving. Today, the additional post-crisis regulation in the financial system and banks has led to a stronger balance sheet and forced improvement in bank practices. From a bondholder perspective, that is a great place to be, a good combination of valuation and improving credit.  Despite our overweight in the banking sector, a dramatic change in the valuation, or a newly-found credit concern would cause us to turn that trade around.  Some of our trades are in markets where there is very little credit or default risk impact and  our decisions are mostly driven by valuation or technical factors. The mortgage-backed market is a perfect example of this. In 2011, the investment theme revolved around buying big premium coupons, where it is difficult to refinance and the mortgage holder will have to continue to pay these high coupons or face difficulties refinancing because of backlog in the bond market or credit quality issues in the mortgage market. We were able to capitalize on that situation.  At the time we had a big overweight in 5.5 percent 30-year mortgage bonds that did well over a period of time. At the end of the year, the premium for those specific bonds got towards the upper limit or target so we reduced and switched into the 3.5 percent coupons, where we thought value was more attractive, knowing that the U.S. Federal Reserve would consider buying these coupons. That move was not motivated by credit, but it was a pure valuation and technical decision. Sometimes our decisions are driven by pure macro factors. In early 2011, we were actively involved with commercial mortgages and subordinated bonds, and we thought that from a credit perspective they were equal in quality to some of the senior bonds in the marketplace but with a much better valuation. However, in the second quarter of 2011 we began worrying about the volatility in the marketplace. We liked the bonds, the credit and valuation but we thought volatility was at its peak, and as our views on the economy were deteriorating, we thought that this segment of the market might suffer from liquidity.   In previous market downturns, commercial mortgages were very volatile. In the long run we managed to sell those bonds ahead of a significant downturn. Q:  How many issuers or securities do you have in your portfolio? What is the turnover in the fund? A : Typically, our upper limit to credit positions is 125 different issuers. We generally limit position sizes in a way that U.S. Treasuries and agency mortgages will have reasonable positions, but any exposure to corporate bonds is going to be limited. At present, we are overweight in investment grade credit, which we see as an attractive segment of the market as the economy is strong enough to support high-quality credit. The turnover in the portfolio excluding mortgage bonds is still over 100% in the past year. Q:  What is your perception of risk and how do you manage it? A : For us, there are two ways to look at risk. The first approach is based on comparison to the benchmark, which helps us determine the level of risk in the portfolio and also measure the tracking error in the fund. A second way we measure risk is through total return risk, and we manage this with the help of the diversification in the fund. Diversification is valuable in that it protects us from the market downturn while helping us to prevent heavy losses in the fund. In the last five years most assets have shown higher correlation compared to the previous two decades. Asset prices that were supposed to diverge in the times of market volatility have turned out to be far more correlated than in the past. However, there are still opportunities in the fixed income market where segments of the markets continue to be uncorrelated. For example, in the emerging markets the fundamentals are so strong that at the end of the day developing economies will show some negative correlation with other segments of the fixed income markets and will be able to generate outsized relative returns.