Q:  What is the investment philosophy behind the fund? A : We believe that having an investment discipline and sticking to it in different market environments will best serve the fund over the long run. Investing in what one knows best is of paramount importance to us and staying within our circle of competence has served us well in the past. Our mandate in the fund is to focus on bonds that have maturities in the intermediate part of the yield curve. The duration will normally vary between 3 and 6 years. Q:  How would you define the investment objective of the fund? A : The fund seeks to build current income as its primary investment objective while aiming at capital growth as its secondary objective. We invest at least 80% of the fund’s assets in fixed income securities. As the name clarifies, the fund normally invests in securities with intermediate maturities and also seeks to maintain dollar-weighted average maturity of one to ten years. At all times we think it’s critical to know well what we are buying, as we try to avoid investing in securities that we do not fully and completely understand. Our investment objectives are to generate total returns in the fund by picking securities that offer better relative value. Our focus on total returns includes capital gains and interest payment. Moreover, we believe in having a very diversified portfolio that takes into account the macro economic conditions we are in. Generally, our holdings may range from investment grade fixed income securities to high yield bonds. Q:  What is your investment process? A : We have a disciplined, repeatable three-step investment process that we follow day in and day out. We believe that if we follow these three simple steps at all times irrespective of the market, we will get returns that are higher than what we can generate otherwise. When you look at the overall landscape of the bond market, over time some sectors will outperform other sectors and vice versa. Our disciplined investment process is geared towards distinguishing between sectors we want to be overweight in and the ones to be underweight in, so that we can generate the best possible risk adjusted returns for our investors. Q:  Would you highlight these three steps? A : As already explained, we focus on bonds that have maturities in the intermediate part of the overall yield curve of the bond market. We start looking at the overall economy and look at where the Fed is in their monetary policy cycle to find out where we believe interest rates are heading. This is an important first step because it gives us an understanding of how the Federal Reserve moves and how their decisions impact the overall bond market. So, we start with a top down view to find out where we are positioned from the interest rate perspective. All our corporate bond analysts, portfolio managers and mortgage analysts meet formally once a week to share views on the economy in the past week and the direction it will take in the coming week. That allows us so to make any necessary adjustments to the fund for the coming week. In such a way we can find out whether our decisions of the past week were apt based on our understanding of the market. The second step is to look at various sectors of the bond market with respect to themes that we generated in our meetings. We also look at other things like corporate or pre-payment concerns of mortgage-backed securities or a flight to quality that is emerging because of European anxieties like now, because sometimes these events bode very well for U.S. treasuries. We try to find out those sectors of the bond market that possess the opportunity for excess returns. We look at their current pricing so that we can estimate their movements both near term and intermediate term. That way we are able to determine the sectors we want to be overweight in and avoid those that we feel will not yield good risk adjusted returns both near term and intermediate term. The third and the final step is the actual selection of the securities and weighting them to fit into our overall objective. As part of this ongoing process, we follow these three steps depending on the themes we develop at our weekly meetings. Q:  What are the fundamental steps of your research process? A : We have five credit analysts who specialize in particular sectors. They conduct a credit analysis almost on a daily basis on every name that they consider. Rather than relying on backward looking credit ratings our process is organized as a forward looking daily research assessment where the analysts communicate directly with the companies their investing in, and reconcile their research with other analysts in the “street” that also follow those same companies.. As every sector of the bond market tends to be different, we will pay attention to various aspects. For example, by looking at the telecom sector we may focus on net revenue gains in the landline space versus the wireless space. In the finance sector, if we are looking at a bank we will focus on a saleable assets that the bank could monetize very easily if the need arose. Likewise, in the industrial space we may want to see some dynamic competitive advantage that will help a company maintain its competitive position and profitability metrics. So, in each sector we consider very different factors that each of our analysts identifies as important for their overall assessment. Q:  Do you exploit a certain methodology for allocation between the treasuries, corporate bonds and agency bonds? A : The best way to explain this would be to take a look at the track record of the fund. In the year 2004, we had approximately 10% of the portfolio in asset-backed securities, 40% in corporate securities, another 40% in mortgage-backed securities and the rest invested in treasuries and agencies. When you look at the asset-backed security sector such as home equity loans, some 15 years back the average size of these loans were around $15,000 or so, with the largest such loan maybe at around $25,000. It was a narrow range of dispersion in terms of the outstanding loans in this sector. But by 2005, the average value of these loans had nearly tripled to some $45,000 with the maximum loan being around $500,000. That convinced us to take a very defensive posture in this sector, especially with respect to the housing market, because of the uncertainly as to how these loans would perform in a weakening economy. We extended this defensive stance to some other sectors by 2007, and at that time the fund went from around 10% in treasuries all the way up to 40%. We also cut our exposure to the corporate sector to around 15% as we became more bearish on the US economy. Now, as treasuries became more and more costly, we have less than 10% in U.S. treasuries and more than 50% in investment grade corporate bonds. The reason for this is because we think that the Fed will hold interest rates for some more time as inflation remains quite benign. This tactical strategy gives us higher yields on our investment grade corporate allocation versus what we would have had being invested in treasuries. As you can see, even though there is no hard and fast rule for our sector allocation. It is more about the thesis that we arrive at that leads us to change our sector bets given a set of circumstances in the market. Q:  How many securities do you typically hold in the portfolio? A : It is paramount to us to maintain a well diversified allocation to corporate bonds and we rarely have more than 1% of the overall portfolio in any corporate name. Over the years and several market cycles we became fully aware of the real benefits of diversification particularly as it relates to corporate bonds. We could have anywhere between 100 to 200 names in the fund at any given time. Q:  What is your benchmark? A : It is the Lipper Short Term Intermediate Investment Grade Index, which is our designated peer group benchmark, and also the Barclay’s Intermediate Government/Credit Bond Index.. Q:  What do you consider as the primary sources of risk and how do you mitigate them? A : We consider all possible risks when we select a security for the fund, like credit risk, interest rate risk, structure risk, call risks and liquidity risk. We will buy only those securities that we can completely put our arms around in terms of their risks to our clients. In the past we avoided Auction Rate Notes only because we could not justify the additional 25 basis points in yields to give up the right to sell securities when we desired. We will only buy a corporate bond if it is on our MTBIA Corporate Bond Approved List. We will only buy those corporate issuers that are being actively followed by our analysts. We migrate to securities that have relatively low liquidity risks, even though this may be giving us a lower yield than some others that are less liquid. At any given point in time we would not like to lead our investors knowingly into a situation where there is a chance of losing the entire investment in that security. Of course, the biggest risk in any fund is losing money. Thus, we maintain a disciplined formalized approach with regard to security selection.. We constantly review available documents registered with the SEC and other news items on our corporate names. We update our mix of securities in the fund to contain the risks from individual names with the intent on producing the best risk adjusted returns available in the market. Inherently, volatility in securities is neither good nor bad, but it does present some opportunities from time to time , and thus we balance our sector bets in order to get the best output at that point in time. Another source of risk is industry concentration. One can do the best security selection underwriting for a number of businesses in the same industry, but that still does not give protection from the downside given that the underlying drivers are the same. While taking all possible sources of risk into account, we practice diversification to limit the downside in the portfolio.