Duke Realty is a company focused on office and industrial properties in the Midwest. The company continued to outperform during the late nineties even when the California-focused REITs were in demand. The Midwest is a relatively slow growth market. But even with that, the company continued to deliver strong revenue and earnings growth and above-average R.O.E. They have highly sought-after real estate development expertise and have a very competitive portfolio of properties in their markets. Even while their markets have below-average rental growth and high vacancy levels, their assets significantly outperformed the market. This is because of management strength, the competitiveness of their portfolio, and their development expertise.

Q: Are you a long-term investor?

A: We generally manage with low turnover and invest for the longer-term in quality REITs. However, we are price-target driven and not time-frame driven.

Q: The popular perception is that rising interest rates will hurt the REIT business. What are your views on that?

A: The basic demand for REITs is coming from economic health, job and wage increases and population growth in specific markets. In our view, we are entering in a long period of rising rates. When they start to rise, the important issue will be the magnitude and the severity of the increases. Currently rates are moving very slowly, and that is positive for REITs. Dividend growth rate for the last seven years has been about 7%. This offsets the interest rates fear. Some people fear that REITs have a lot of variable debt, but the reality is different. Most REITs have little or no variable debt. I believe that the coming period of rising interest rate will also reflect higher level of vitality in the economic environment.

Q: Why are convertible securities in the fund?

A: Convertible securities form 15% of the fund with approximately 25 securities. They are less volatile relative to the bond and equities and have the upside participation of the equities. The convertibles allows us to have exposure to other parts of the market that we can not get through REITs, high yield bonds, or large cap value. It also allows us to leverage the expertise of the research that we have in other sectors such as mid- and large-cap equities. For example, Constellation Brands is a small cap company. We have this company's convertible bonds, and we believe that we will have 75% or more of the upside when the company's common stock appreciates. The company is one of the largest distributors of imported alcoholic beverages from Mexico and Australia.

The fund is designed for the risk-adverse investor who is looking to round out the well-diversified portfolio, who has high need for income, and who demands lower price volatility.

Q: Tim, how is the High Yield sector contributing to the fund?

A: This portion of the fund has 100 to 150 securities in the portfolio that are non-investment grade bonds, that versus the Bear Stearns High Yield index have slightly higher credit risk so the portfolio outyields the benchmark. We base our investment process on security selection to generate alpha, therefore relying less on macro level analysis to effect performance. Our average position is 0.75%, which gives us ample diversification, but a focused enough portfolio to allow our bottom-up philosophy to work. In the past, we have underweighted healthcare because of the fundamentals and underweighted gaming because of the yield in the sector. We have not owned airline bonds, but inside the transportation sector we have been in shipping bonds because it has more stable cash flow than the airline sector.