Q:  Would you describe your investment philosophy?

A: Our philosophy is grounded on active sector rotation combined with a disciplined risk management process and security selection. We believe that this is the most effective way to achieve excess returns in the fixed income market. We select holdings from a universe of up to 12 bond market sectors, which include traditional sectors in the Lehman Brothers Aggregate Bond Index. The additional ones include core plus sectors, such as high-yield bonds, emerging markets debt, and non-dollar securities.

Q:  What is your priority when managing your clients’ money? Is it preservation of capital or aggressive growth?

A: For this short duration fund our primary objective is preservation of capital through stability of NAV. Competitive income, combined with achieving total return would be secondary objectives. The cornerstones of our philosophy are consistency, risk-adjusted returns and preservation of capital.

The most important attribute of our style probably is the duration neutral approach. We prefer sector rotation rather than interest-rate anticipation. We have similar risk to the benchmark and the peer group, adding value through the active sector rotation. Two-thirds of our attributions come from sector selection and one-third from issue selection.

Q:  Why is being duration neutral of such of high importance in your philosophy?

A: We’ve seen many funds that have great sector calls and great issue selection but lack the consistency and stability of our fund because they make duration bets. Being duration neutral has worked unbelievably well; we are recognized by Lipper for consistency of returns over the last decade.

Making huge duration bets is inconsistent with our philosophy of preservation of capital and consistency of risk adjusted returns. Our expertise is identifying sector valuations and then trying to hit singles and doubles with issue selection as opposed to trying to manage the duration based on where we think the market is going.

Q:  Is tax efficiency part of your objectives?

A: The short duration fund is one of the most tax-efficient products over the last decade, but that wasn’t our main ob jective. It is a by-product of our sell discipline. In the last four years of a volatile credit environment, when we have monitored prices on a weekly and monthly basis, we are better sellers, i.e. before bad news and downward price movement occur. This approach has generated small taxes carried forwards.

Q:  How do you implement this philosophy in your strategy?

A: We are value-driven, research-intensive and opportunistic. We employ active management by selecting sectors and securities which we believe represent the best value, focusing on core-like sectors to add value. We tactically use core-plus sectors to add alpha, tightly controling portfolio risk through a variety of means. Unlike a lot of our competitors, who would use 3 to 5 sectors in style management, we use all twelve.

Nimbleness and granularity are concepts that make a huge difference in this environment. In 1996 when everything went up, you could make a horrible selection of issues and still do well. From 1999 to 2003, issue selection was of utmost importance but granularity gives you the ability to have a few bad calls without blowing up your portfolio.

The focus on liquidity is of utmost importance. Purchasing benchmark issues if you are buying foreign, staying in the sovereign names, buying securities that are senior in the capital structure and have better liquidity. When you have liquidity, you can really employ sell discipline.

Q:  What constitutes your core group and how do you monitor it?

A: Our core sectors include those of the Lehman Brothers Aggregate Bond Index: US government securities, treasuries, agency mortgage-backed Ginnies and Fannies, investment grade corporate bonds, investment grade Yankee bonds, investment grade Brady US dollar-denominated foreign issuers, commercial mortgage-backed securities, asset-backed securities, and taxable munis.

There are also some securities that are not necessarily in the index, but we still feel they are core sectors. Those would include some non-corporate bonds, some non-agency mortgage securities that don’t qualify for Fannie and Ginnie guarantees, munis when they make sense on a total return basis. The extended bond universe, or the enhanced core with alpha adders would include high-yield bonds, emerging markets debt and non-dollar securities.

Q:  Could you tell us more about your research process as part of the portfolio construction process?

A: Our investment process relies on intensive fundamental analysis and disciplined risk management. There are 4 essential steps - sector analysis and sector allocation as the primary driver of performance and fundamental research and issue selection being second. Through those steps we generate portfolio construction and risk management portfolio oversight.

We have 12 sector managers who have been with us for a decade or more and 26 investment professionals broken up by sectors. We bonus everybody on the team based on composite results rather than assets under management. In that way people do not try to push the exposure to their sector higher, because they will be paid even if they suggest zero exposure to their sector at a certain time.