Q: I view this fund as one level above a money market fund. How do you view it? A: We try, when we talk to potential clients, to stay away from money funds, at least to some degree, in that they have a NAV that does not change much over time. And this is definitely a fluctuating NAV fund. So, what we do is talk about duration equivalent alternatives such as short Treasury bills and CDs. We do use a money fund index as a benchmark. Morningstar would call it ultra short. It means duration of one and a half years or less. It's on the very short end of the yield curve. Q: The holdings are obviously of high quality. What is the overall credit quality rating? A: Actually, the fund is triple A-rated. It’s also rated by Moody’s as triple A and MR-1. The MR-1 rating stands for market risk. They perform a due diligence on the procedures that we use to manage the fund and they give it a market risk rating. That rating is actually the highest Moody’s will give. I would say it’s on the very conservative end in terms of credit. Q: Is this an alternative investment suitable for someone protecting cash while waiting to enter other areas of the market? A: When I talk about the fund to investors, I use a chart that has every year's return on the fund going back to inception. The particular thing I like to point out is that returns on the top range – 1994 was outside, so let me take that by itself – from probably a low of about 4% to a high of about 8%. The point is that you had a good, solid total rate of return, despite the interest rate environment. Since 1992, it covers rate environments from the very bullish to the very bearish. In 1994, the fund returned a little over 1% in one of the worst bond markets in history. Q: 1994 was a tough year for bonds. A: Very tough. This fund invests primarily in mortgage-backed securities. If you look at an index like the Mortgage Master, it was down almost 2% in 1994. But, this fund returned a little over 1% despite almost every other bond fund being negative. What I like to say is we have good solid returns. You're not going to get rich. There are no double-digit returns in there. But there are no negatives, either. Q: How about the importance of liquidity? A: The other things I talk about a lot in presentations are liquidity needs in the economy. For example, how much job security do individuals have nowadays? Not much, right? How much liquidity do corporations need? They need a lot because with the over leverage that has been used in the past decade or so, they found out that they can get downgraded pretty quickly from investment grade down to junk. The needs for liquidity are great. And, within that liquidity bucket, you need things that are very liquid but give you good returns. That's the way we position this particular offering. Q: In reviewing the turnover rate, even though the fund duration is ultra short, it also has an extremely low turnover. A: The fund has grown so significantly that we're very busy putting new cash to work. We can actually structure our portfolio based on new cash that comes in. The other aspect is that over the last eight months or so, it's been pretty much of a range trading environment with a bias to lower rates. There hasn't been a huge reason to change our strategy because rates haven't changed that much. Those two things would be responsible for the low turnover. Q: Are you still seeing fund inflows? Are the inflows primarily from institutional sources or from retail investors? A: It's both. It really appeals to a wide range of investors, mostly for the reasons I mentioned. Good solid returns despite the interest rate environment and the need for liquidity that many folks find themselves in. Q: How do you adjust for a change in rates? A: There are several different ways. We actually have a macro level process that is responsible for anticipating and responding to changes in rates. There are five variables within that process. The first is duration. We're like any other bond manager that will shorten duration. Our benchmark is the six-month Treasury bill. In a bear market, we'll try to get slightly inside the benchmark. The second component is the index mix. I went through a list recently and there must be 10 to 15 different indices that we invest. That is just the nature of the adjustable rate mortgage universe. The point is that there are leading indices and lagging indices. An example of a leading index would be something like LIBOR. That changes virtually instantaneously with any kind of change in the economic climate. The cost of funds index would be a lagging index. Basically, they are composed of thrift liabilities that move very slowly. The way the portfolio uses this index mix is a response mechanism to changes in rates. Alternatively, we have more now in the lagging indices, the ones that are not going to respond as quickly in a bull or flat market, which is where we are now. Q: The adjustable rate market is certainly more complex than the average lay investor would realize. A: The third component is the fixed and floating mix. Due to the SEC name rule, we need to have at least 80% in adjustable rate or floating securities. We can have up to 20% in fixed income. We'll be up to 20% in a bull market, because fixed rates outperform floating rates in bull markets. Conversely, in a bear market, that fixed percentage is going to get very low. That is another lever we use to modify the portfolio in anticipation of changes in interest rates. The fourth one is the reset mix. We are mandated to have a 12-month weighted average reset or shorter. In a bull market, we are going to be at the maximum, because it enables us to keep that yield in the portfolio as high as possible for as long as possible. Alternatively, if the market is bearish and we know rates are going up, that reset is going to be significantly within 12 months. The fifth component is the cap and floor structure. That is important because as rates rise, you hit caps on a lot of these securities. As we look at the portfolio from a top down perspective, we are always mindful of what our cap risk is. Q: That kind of attention to detail suggests to me that you work with a group of people that stay glued to computer monitors all day. A: Absolutely. There are actually four people, myself included. I spend most of my time in the markets. I think a lot of our performance is generated from capitalizing on market opportunities. For example, the seasoned mortgages I talked about. They have to come from somewhere, and it's generally a seller. It is usually a bank money manager. They all have a list that is out for bIdent, and I'll bid on it. Q: What do the other team members concentrate on? A: The other folks do the analysis. We do a lot of work on the front end before we buy anything to make sure that it fits into our strategy. There is a lot of number crunching. Our portfolio packet is well over an inch think with all the securities and analyses. Q: That 13% turnover suggests you are aware of liquidity when you buy. How do you handle your selling? A: There is not that much that can be done in this fund that is not substantial. One example would be something I sold earlier this year. There was a need in the marketplace for a particular type of floating rate security. Someone had made a locked market. In other words, they were willing to bid and offer at the exact same place. I hurried to get this particular dealer. My position fit that inquiry. When you can sell your bonds on the offer side, this is something you try to capitalize on. Basically there are shifts in the market that take place from to time that you find yourself wanting to do something about it, so we do. Q: Does your research team meet every morning? Is that part of the in-house function? A: We all sit together. I joke around that we're each slaves in cube farms. We literally sit right off of a trading desk, so we can pretty much speak to each other all day. We do have a weekly meeting that is formal where we cover what is going in the market and what problems we foresee. Q: How much emphasis do you place on capital gains versus income flow? A: In the last couple of years, capital gains have been a more significant return generator for this fund than they usually are. This fund is going to get a lot of its return from income. Every basis point is very dear. The reality is how much capital gain are you going to get with rates so low? They can only rally but so much more. That goes back to that micro process where we select every security very carefully for its income earning potential. Q: As far as the talk about a housing bubble is concerned, how do you as a person 'on the front line' view this buzz? A: I think it is a fair thing to think and talk about. Home prices have accelerated significantly. It's not only been in the last year or so. It's been for quite some time. I see the risk, though, more from the aspect of a 1993 to 1994 scenario. In 1993, home price appreciation was negative. It actually helped set up a more volatile year the following year because folks could not move, basically. If you work in New York, and you get a job opportunity in Los Angeles that you would like to take, one of the aspects of taking it or not is can you get out of your house without losing money. In 1993, with negative home price appreciation, the answer would have been you couldn't. What concerns me most about home prices going up so significantly is that at some point it has to stop. It's not going to go up forever. What I worry about is the very fast prepayment environment we find ourselves in now in comparison to one that happened in 1994 when prepayments virtually ground to a halt. It just introduces more volatility into the markets, which is always something to worry about. I don't necessarily feel it is a bubble. I feel that there is some frothiness to it, maybe, and it won't last forever. But I think there is a great danger in forecasting those things to go on for a long, long time.