Q:  What is the history and mission of the fund? A : American Century Core Plus Fund was launched on November 30, 2006, and I have been a member of the portfolio management team since its inception. We have a seasoned team, with average industry experience of 18 years. The fund strives to generate above average total returns and a monthly income stream through a mix of investment-grade and higher yielding securities. Q:  What are the tenets of your investment philosophy? A : Our aim is to provide returns throughout the business cycle on a risk adjusted basis that are consistent and similar to an income stream from bonds. We are actively managing our bond portfolio utilizing duration/yield curve positioning, sector allocation and security selection. Our belief is that there are parts of the bond market that are inherently inefficient and mean reverting, so our philosophy is premised on exploiting those inefficiencies and mean reverting aspects of the fixed income market. There are three fundamental principles behind our philosophy. One: fundamentals dominate over time and serve as the basis of all of our relative value assessments, whether it is yield curve management, sector allocation, or security selection. Number two is active risk budgeting – in other words, maximizing opportunities while minimizing losses and avoiding risks. Finally, the third pillar of our philosophy is diversification through a variety of sources of returns. We are always looking to have a wide range of active positions in the portfolio, from yield curve and allocation decisions to security selection. Q:  How do you convert this philosophy into an investment strategy? A : We employ a core plus strategy, which means that 65% of the portfolio must be in investment grade corporate bonds, 35% can be invested in high yield or emerging markets debt, and we can invest up to 10% in non-dollar securities. The way we adhere to this model is through a diversity of active positions: duration, yield curve and sector allocation management, as well as security selection, all surrounded by intelligent risk controls. Being an institutional fixed income manager, we have a global team focused on macro economics charged with formulating the broad investment themes and risk management. Additionally, we have sector teams focused on rates, individual corporate issuers, mortgage bonds and the municipal bonds, and each of the teams is responsible for making decisions on buying and selling securities. These teams also implement the strategies from the duration, yield curve and sector allocation perspective. Around 25% of our excess returns over a full market cycle would come from duration and yield curve management, with another 25% being generated from sector allocation and security selection. With regards to the duration and yield curve, we start with an opinion on the economy by utilizing two models that we have developed in-house. The first model is organized around an interest rate and economic score card that factors in a variety of fundamental characteristics such as employment, housing and retail sales. We review the score over a 25-year period by looking both at the level and the trend. Then, the second model is based on a consumer trend indicator designed to capture turning points in the economy. By applying the two models, we formulate a probability weighted outlook based on gross domestic product and interest rates, which determines our yield curve positioning. A further step in the investment process is to determine our sector allocation. Once again, we use a combination of two proprietary models to do that. We begin with a thorough analysis of the yield differences between each of the sectors over time, and we also ask each of our sector teams – the corporate team, mortgage team and municipal team – to develop expected return profiles for each of their sectors, respectively, given the probability weighted economic outlooks that we have developed and given to them. Once we have ranked each of those sectors in terms of expected returns and risk, we will factor them in to arrive at our sector allocation decision. As part of our ongoing review process, the macro team and all of the team leaders of the various sector teams meet once a week to discuss our duration, yield curve positioning, sector allocation positioning or risk management. When we have developed our sector allocation decision, our sector teams develop a plan at the security and the industry level for further execution of the decision. Q:  Could you illustrate your security selection process with some examples? A : One example on the credit side is the environment back in late 2008, early 2009, when credit spreads were at wide levels versus Treasuries. At that time, one of the bonds that we owned was Viacom, Inc., an entertainment content company. What made Viacom’s bond attractive to us was the fact that its yield spreads were widening together with those of bonds from banks in the financial crisis, even though Viacom was not in the financial industry. Despite a fair amount of economic uncertainty, Viacom had a large portion of its revenues from subscription of cable channels. But more importantly, management was trying to delever the balance sheet and they had made the commitment to do so. In Viacom, we saw a bond that was widening out with financials and a company that was committed to lowering its leverage. And as the economy improved and the banking crisis alleviated, the credit was upgraded. What is more, Viacom was a company that had consistent cash flow even when the economy was weakening. In a different space, commercial mortgages are an example of an area that has been beaten up over the years. Although a large number of firms have exited that space, we feel that the macro and fundamental picture has stabilized. We also like the area because it offers a limited amount of high quality bonds that, given our expertise in the area, we can identify as providing attractive total return opportunities for the portfolio. Q:  What are the main factors that guide your diversification process? A : Unintended consequences and risks are part and parcel of the portfolio, which is why we develop risk budgets and risk targets. At present, our risk target is 40% of our long-term risk. Then we decide where to find and own risk, choosing between yield curve positioning, allocation and security selection. On the outset, we want to have a variety of active positions when they are available. From a security selection basis, we rarely put more than between 20 and 50 basis points in any one name simply to achieve additional diversification. Q:  How do you build your portfolio? A : Since this is a diversified fund, we like to have a variety of names in the portfolio. From a sector standpoint, it is plus or minus one-year spread duration, with both our sector allocation and security level decisions based on valuations. Generally, we tend to have around 300 names in the portfolio. As far as the risk and diversification controls are concerned, they come down to linear and tracking error targets. Essentially, whether it is a mortgage credit or a corporate credit we do not need to have more than 50 basis points in a name. This the type of diversification that we seek to maintain. Our benchmark is the Barclays Capital U.S. Aggregate Bond Index. Q:  What is your sell discipline? A : Our sell decisions are purely based on fundamentals and outlook. This dynamic process is takes into account our valuations and outlook, whether it is on the economy, or any one particular company or a sector. Q:  How do you use non-dollar denominated assets to your advantage? A : As an example, back in 2006/2007, we owned yen bonds as a way to diversify the various credit risks in the portfolio. Over the last year, we have also owned German and UK bonds as the financial crisis in the euro zone keeps, in our view, the European economies weaker than the US economy. In our sector allocation models, the non-dollar trade has stood out as an attractive way of diversifying the risks of the portfolio. Our sector allocation decision process largely benefits from the input of our teams in New York and London, UK. Once a week, all of us get together in a video conference with our team members in London and New York, whereas our credit teams meet on a daily basis. The hallmark of our process is staying true to our models that remove any personal biases and integrate the insights of our teams. We have developed an institutional framework with solid risk controls and with the help of a seasoned team of professionals who have worked together for a long time. This collegiate work environment with people that we know and understand is key to our success. Q:  How do you mitigate risk in the portfolio? A : We break down risk into three areas – predicted risk, realized risk and oversight. With regards to predicted risk, we look at the conventional measures such as market value over-and-under versus the benchmark, spread duration, as well as tracking error to the portfolio. Secondly, we closely monitor realized risk in our risk attribution methodology. Here, our feedback tells us whether the portfolios are reacting the way we would expect them to do. Lastly, we rely on oversight by writing playbooks and having targeted levels on allocation. The oversight rule ensures that the portfolio is positioned according to our convictions at any point in time.