Q:  What is the history of the fund? A : The fund was established in 1988, and the current senior management team has been in place since 2009. The fund has a total of $1.2 billion in assets and invests in broad sectors of fixed income securities. We focus on in-depth original research to find securities that offer genuine value. Our balanced, adaptive analysis is guided by constant attention to the business cycle and sensitivity to global macro-economic events. Q:  What makes the fund unique? A : We are certainly distinctive in the way our broad and deep teams of researchers work together to develop original insights and build a portfolio that reliably achieves a favorable return-to-risk balance across a wide variety of securities. We have an open process that avoids preconceived prejudice in favor of any one source of excess returns. Opportunities change over the course of the business cycle, and our broad menu of options keeps us from falling in love with outdated ideas. I’ll give you an example: many large bond funds depend on interest rate anticipation, which is a binary source of returns. You are either right or wrong in any given period. We integrate our global macro view across every sector and individual bond position, a fundamentally more diversified strategy. In our view, this approach enhances upside potential and downside protection at the same time. Q:  What are your key investment beliefs? A : Our core belief is to seek broad diversification across every investment we make and achieve risk control that is built-in to every step of the process rather than added on as an afterthought. We try to be right on many small decisions and avoid taking big, make-or-break positions. Bond investors don’t like losing money. By integrating our view of the global macro environment into every purchase and sell decision we capitalize on the insights of the individual sector management teams without compromising our concerns for the big risks that can blindside the fund’s performance. Q:  What is your investment process? A : We have over 100 fixed income analysts and portfolio managers in Atlanta, Georgia covering every major segment of the U.S. and global bond markets. As I said, the process keeps in mind our risk limits while melding top-down economic views with individual security selection. First, we formulate an overarching bond market view by involving all senior leaders from all segments of the bond market. We get input from the sector teams and build a strategic view of the macro environment, how it is best defined, and what the opportunities are within each sector. From there, we set the strategic asset allocation in the fund for the various sectors and segments of the market. Second, we look at the individual portfolio’s return objectives and risk limits. We take those inputs and build the efficient frontier for investment. We look to achieve the right combination of assets, considering historical data and our expectations for change in the future. Third, we have world-class teams within each market segment to make security selections, and the head of each sector team participates in building the asset allocation strategy. So at this point, the head of the investment-grade credit team person will work with his or her team to build a portfolio of corporate bonds with a thorough understanding of the overall macro strategy. Because the head of the group is part of the strategy formulation at its inception, he or she has an understanding of the risk and return expectations from a macro perspective and is much better able to guide the sector investment team. Finally, we step back and review exactly how the fund is performing. We make sure that we understand the changing correlations across sectors and risk factors. And we stay vigilant to ensure the fund is generating appropriate returns given the risk profile. We repeat the four steps every day to make sure that we are staying the course despite the day-to-day market volatility. With so many asset types in the fund, we work continuously on every step of the process and don’t take anything for granted. Q:  How is your research process different? A : First and foremost, it is our belief that having the research process as close as possible to the investment decisions is critical. We believe that research processes can be built in two ways: either aligned closely with the actual creation of the portfolio or with research more separated, owing to a belief that this approach is less influenced by market volatility. For example, one could step back when analyzing a company and do an analysis looking at cash flow generation, earnings potential, liquidity, management and the like, but what matters to the market and the price of that security may change over time. Our view is that it is best to have an understanding of what is actually going to drive the price change in the market. Consider the situation in 2008 and 2009 when our analysts were doing in-depth studies of the earnings potential of financial institutions. What mattered more than the fundamentals at that time was market liquidity. There is a point in the credit cycle where the long-term earnings power of financial institutions will drive their bond prices, which is the case now. Today, the liquidity question has largely been answered. Looking in-depth at the liquidity positions of major financial institutions is no longer a key driver or an insight that is going to help us predict the movement of bond prices to generate better returns. But in 2008, the liquidity metric was driving the price of these bonds. Our belief is that the drivers of bond prices change over time; therefore, we like to have research very closely aligned to the ultimate buy-sell investment decision by the portfolio manager to make sure there is an understanding of what is likely to move market prices and what is not. That allows us to use our research teams to the fullest -- not only as experts about the companies or securitized investments they are analyzing, but also to dig deeper into the factors that are more likely to move prices in the near term. We think that approach differentiates us from our peers. It is entirely possible to do a lot of analysis that does not help drive value creation. We think it is important to realize what is important to the market and focus on those areas. The cross-pollination of ideas also differentiates us. We share information as much as possible at every step of the process. In our macro process, we involve economists and global macro specialists as well as yield curve analysis. We share as much information as possible with the sector portfolio managers. We also do this at the security level. An example would be with securitized issues such as commercial mortgage backed securities. Our commercial mortgage-backed team has views of the value, trading trends and risk/return opportunities in its sector and also derives benefit from the insights of the direct lending team of more than 40 people who are making whole loans on commercial properties nationally. The whole loan team analyzes and re-underwrites the major properties in every CMBS position we take. So we are not just looking at financial reports to try and get an idea of what properties are worth; we have an expert team that manages a portfolio of commercial buildings worth over $10 billion which gives us a better perspective from which to understand our investments. Our research teams are embedded into our sector teams so, for example, within the 14-person investment grade credit team, there is a head and a research team that works alongside the portfolio managers. We use this same structure for all of our bond teams. Q:  Why do you like to embed research team with your portfolio managers? A : We prefer having the research and analytical functions embedded into the portfolio team rather than separating them because we value the constant feedback of information. We believe doing research as close to the portfolio as possible is the best model for investing. That way, everyone’s interests are aligned to deliver the best return for shareholders. Q:  What is your portfolio construction process and can you share some examples? A : Our process is to both allocate based on a percentage of assets but also with respect to a risk budget. Our belief is that an integrated, risk-managed portfolio is better than sector teams operating in a fragmented way; because that approach can result in higher unanticipated risks at the total portfolio level. Going back to the global macro environment, when the heads of teams meet, we generate a series of investment themes. For example, they might consider such issues as whether inflation is a concern in the near term for the US and when and whether Western Europe will stabilize given the aggressive stance of the European Central Bank. The sector heads build the portfolios with knowledge of and adherence to the themes discussed in the meetings with their peers. If each one of our segments were leaning toward European risk and each component was fine on a standalone basis, but the overall portfolio had too much European risk, then we would constrain that. There can be times when different components of the different sectors can work better together. There are times in the securitized space, for example, when short-dated securities offer more relative value than short-dated corporate bonds. We can allocate in favor of one component of the securitized market and tailor our exposure to the attractive segment. On the flip side, we can have our corporate bond teams extend out and buy the back-end of credit curves in longer dated maturities, if we find that more attractive. Q:  Across what fixed income securities asset classes can you allocate in the portfolio? A : We can be opportunistic across all segments of the bond market, but 80% or more of the portfolio has to be rated investment-grade. Investment-grade corporate bonds will typically comprise 10% to 35% of the portfolio. High yield and emerging markets, which are generally below investment-grade, are capped at 20%. Mortgage assets would typically range from 20% to 40%. Commercial mortgage-backed securities are generally zero to 15% of the portfolio. Other securitized assets such as non-agency mortgages, asset-backed securities and so on, would be somewhere between zero and 15% of the fund. Government securities might range between 5% and 40%. We can also opportunistically look at foreign sovereign bonds such as Western Europe or Asia, which are not emerging markets. We can also consider inflation-protected securities (TIPS) issued by the U.S. Treasury. Q:  What is your benchmark and how do you reference it? A : Our benchmark is the Barclays U.S. Aggregate Bond Index, a widely followed proxy for the entire U.S. bond market as well as a meaningful representation our competitive peer group and the risk tolerance of our shareholders. We view risk relative to that benchmark, and we keep the tracking error low, in the range of 150 to 300 basis points on an annualized basis. Our approach is very risk efficient, so that is typically all we need as a risk budget to beat the benchmark by a healthy margin and rank well against the competition. At any given time, the fund will be comprised of several hundred positions in total. It could be 100-plus issues in corporate bonds to support our diversification objectives; we might have another 50-plus holdings in mortgage and securitized assets, and in sovereigns and other categories, we may have another 30-plus. Q:  How do you define and manage risk? A : Our general approach is to take as many views of risk as possible, understanding that each one is inherently limited in what it can tell us. In this regard, ten imperfect, yet insightful, answers to a question are more useful than believing that there is one perfect answer. When we build a portfolio, we establish an overall risk allocation budget. We look at how much active risk we are taking relative to the benchmark, measured, as I said, in terms of tracking error. We dial that up or down depending on the attractiveness of the opportunities we find. We then look at a risk decomposition report so we know where the risks are coming from. Typically, only a small amount of our portfolio risk—20% or less over time—is related to interest rate and yield curve risk. We focus much more on rotating across bond market sectors and in picking the right securities because, with our broad array of fixed income themes, those strategies are an efficient way to spend our risk budget. We use a factor model to decompose the risks in each individual sector just to be sure every position we take is intentional, measured and consistent with our expectations. Q:  How important is it to look at the drivers and components of risks? A : It’s absolutely vital. Relationships between risk factors are not static; they change continually, and in a crisis, like in 2008, many bad things can happen at the same time. We will look at key points in the past, say the mortgage crisis, the financial crisis, or the emerging markets crisis, and model what our current portfolio would have done in these scenarios and make a judgment if that is risk we are willing to take or not. Good performance depends not only on being right as often as possible, but also on thinking long and hard about what to do if we are wrong so we could move quickly to take corrective action. It may sound obsessive, but if we can avoid losing money, we don’t need to make up the difference later.