Q:  What are the main principles behind your investment philosophy? A : Our philosophy is that if we take risk in the fund, we want to be appropriately paid for adding that risk. For instance, when we look to build the portfolio and take risk positions in funds, we do not only pay attention to relative risk pricing but also to absolute risk pricing. Our focus is not on the cheapest bond or sector available but on the long-term value of the investment and the corresponding risk that we are taking in the portfolio. We are looking to outperform not in the next quarter but over the lifecycle of an investment. We believe in keeping risk within our abilities, and our fund is structured in such a way that we typically hold bonds with short maturities. Q:  How does your investment philosophy translate into an investment strategy? A : Our investment objective is to provide consistent income while also seeking to maintain a high degree of stability of shareholders’ capital. The fund invests in securities of varying maturities, but seeks to maintain an average duration of no longer than three years. The fund may invest in lower-quality and non-rated securities, which present greater risk of loss of principal and interest than higher-quality securities. As part of our approach, we seek to enhance total returns through a global strategy, which seeks to identify the relative value among global bond and currency markets, and then to benefit from disparities through the use of fixed-income futures and currency forward contracts. Q:  What is your research process? A : Our idea generation is really holistic at the high level. We look at as many information sources as we can. We read research from brokerage firms and independent analysts, and internal research and consistently look for themes. We are not looking for consensus but are looking for sensibly articulated inference into the market and the economy and what we’re trying to do is put together a mosaic outlook at a higher level. We spend a lot of time reading, listening to conference calls and aggregating data. Next, as we drill down, the process becomes one of interacting more and more with the sector managers and the credit analysts and using their strengths to refine views and understanding how their point of view fits into the risk parameters of the given fund. It’s not just a research view which then trickles down to the trading desk. Within all of the sectors, we are next to the trading desks and if there are bonds which are unique or just interesting structures, the traders come over to us to see if we are interested in buying that. In the same way, the research team is more interested in the broad theme. But we benefit from both of those. And then at the basic security level, we have a lot of bonds that we own in the portfolios for all our business clients and so we monitor a lot of names. We cover a lot of sectors and industries and in that process we have a lot of securities with a lot of opinions on it. There is a very granular set of published opinions that can help guide us towards the actual specific bond ideas. Q:  Can you discuss some sectors or specific opportunities in the past that you found valuable through your research process? A : For instance, when the government started issuing FDIC guaranteed bank debt, our team got involved early on in the process both in terms of talking to investment bankers, dealing with the government entities, bringing the details of the debt to market, reading the documents, getting assurance to understand that the government guarantee is there as advertised. Early discussions with our government trading specialist about pricing of the issue helped us to take exposure in the sector before others could take advantage of. Earlier in the year, we looked at the investment grade energy sector - natural gas pipeline business was very cheap, partially because of general bond market fears as well as temporary uncertainty over certain commodity prices. We look for this kind of asset-rich business where either the companies own production or delivery assets. Working with credit teams, we are able to put together a list of companies that are very difficult to either enter because of capital costs or regulatory approval. We will either look forward in the market or look at new issues from these companies. Q:  What is your portfolio construction process? A : We structure our top-down view based on our outlook for the next two years and we try to think about what the dominant trends are in the bond market, what the important risk factors will be in the context to those trends, and how those risk factors and trends will play into asset pricing. We can think about it both in terms of thinking forward to some horizon date and then form views on things based on where we think the world is moving and we think about what that transition means in terms of returns which gives us a sense about the return profile relative to risk. Then we go down to our sector teams and analysts and work with them to create the bottom-up construction of the portfolio, with the constraint that if the bottoms up process doesn’t give us ideas to implement the top-down view, we can’t implement it. So it’s never a generic allocation and we don’t force the allocation. As a matter of strategy, we start top down but we implement bottom up and we rely on the expertise of the analysts to help us control risk in the portfolio holdings. We need the intersection of the two approaches to create positions in portfolios and without getting fancy about duration limits, the risk limits or correlation matrices or dubious data techniques, is a practical way to leverage a large platform with a lot of experienced analysts and managers to control risk in the portfolio. We would buy something we were comfortable with, maybe 0.5% or 0.25% because that’s what our research team recommended and then be comfortable in not having the full allocation of what we were looking at. We also have a discipline known as the Duration Times Spread which is an interesting way to look at things and it’s something that changes daily as spreads change but durations on corporate bonds are relatively static. We could say the same thing with mortgages as the duration changes in the spread but it’s an interesting benchmark to monitor if we’ve increased or decreased the risks of the portfolio a lot quicker than some of the other methodologies. The DTS is an important way to normalize risk based on the market view. So unless we are running a strategy or maybe a risk allocation that’s at its core contrarian in fixed income especially, it doesn’t pay to be a contrarian because the nature of the market is such that investment-grade fixed income pricing is always a matter of market confidence in an entity or a sector. If the market spreads are indicating that there is less confidence in the sector than another, at a minimum it is indicative that it’s more volatile and risky. In such a way our strategy always reflects not just the bond math or the rating agency description of risk but the market description of risk. That helps us control positions sizes and forces us to recognize how much the market matters too. Q:  What are your views on the role of the rating agencies? A : The biggest part that official ratings play is around constraints in portfolio holdings. The ratings play a role in how many holdings we have that correspond to a certain risks and ratings. We care about risks and volatility that comes with the downward revision and we want to make sure that the market view is appropriate to the risk of that action. Sometimes we think about the benefits to potential upgrades but the market moves so much faster on credit news that upward rating revisions are generally after the market has moved. In our view for our portfolios the ratings are more about triggering market events than really about pricing. And that's more a function of the regulatory schemes that are ratings dependent and the actions that ratings dependent regulatory schemes. We want to be on the right side of the trade when those things happen. Q:  Could you elaborate a little more on portfolio diversification? A : Our belief is that diversified issues frequently share common risk factors, hence we need to account for that when we build our portfolios. A case in point would be the commercial mortgage backed security sector where people were comfortable with larger than benchmark allocations because they thought they had these underlying deals that were super-diversified and that they would buy many of these super-diversified deals. But really at the core of the asset class, there was obviously a risk. So we've been working to think hard about risk allocations in terms of fundamental downside risk factors rather than just traditional Class I, Class II, Class III kind of benchmark classifications. We recognize that in the fixed income markets payoffs are asymmetric, and generally, on the coupon or the stated yield we have the downside risk in default and so really protecting against the idiosyncratic risk becomes ultimately the most important thing. We tend not to worry so much about benchmark allocations at the individual issuer level and control risk more in an absolute sense there. We try to view diversification in a more fundamental, absolute sense. Because we have deep research teams and trading desks in each of the sectors in this fund, we're able to utilize an array of asset classes that we're going to diversify by bond and not get too heavy on certain credit sectors or what we believe riskier uncertain securities so it's not only diversified across asset class just within each asset class we'll diversify even further. Q:  How do you view risk and what measures do you take to control risk? A : We don’t worry too much about credit risk in U.S. Treasuries. We tend to be neutral in interest rate risk for bond funds. And for given funds will identify what that neutral position is, either based on client preferences or some peer analysis but in some way will come to a point that we think is our neutral duration position and will generally manage to be close around that. Then, we bucket things into bigger categories of risk such as yield curve risk, the relative levels of different points of the yield curve, convexity risk, volatility risk, credit risk, liquidity risk and if we want to take risks along those dimension we'll be looking for the most efficient ways to do that. The financial crisis proved that despite being diversified across asset classes we had risk if we didn’t own Treasuries. We are working to avoid underperformance through the duration times spread which doesn’t really tell when spreads are going to widen but maybe, as we look at that closer we can use it to make forecasts. Moreover, we also utilize software which gives a bunch of different risk parameters also which we find helpful to track risk over time. We like this one because it's a disciplined external view and theoretically a robust way of looking at the bond market risk. So that's another way where we look for maybe things that we missed with our more holistic/heuristic approach. We do like to appeal to something more scientific as a way to just get another viewpoint. This software allows us in the end of each month or period to look at attribution. We don’t have currency risk or things like that in this portfolio but occasionally it’s helpful to see that maybe something we thought had scaled to a different measure either contributed or detracted a little more than we would have thought. Q:  What are the lessons learned from the ongoing economic crisis? A : What we suffered mostly was liquidity risk, though we had done a good job in terms of buying good underlying securities and staying away from the things that evaporated very quickly as the crisis hit. For example, many of the mortgage bonds just went away, the losses produced were so massive that the deals were, if not wiped out, took huge percentage losses and we avoided a lot of that. But we still suffered mark-to-market in the fourth quarter and what we found ourselves caught behind was a difficult liquidity position in the fund where we had filled up a lot of risk buckets and not left ourselves a lot of maneuverability in terms of highly liquid securities like Treasuries or agencies to let us take advantage of a downturn in prices and increase in opportunity. We think that the lesson of liquidity is a really critical one learned from this crisis as a fund. And again, another lesson is to keep the portfolio appropriate to the mandate.