The Management Discipline of the Broad Market Bond Strategy

The portfolio management team employs a "Value" strategy. We purchase only corporate bonds and seek those that are undervalued. Investment decisions made by the management team are based on proprietary fundamental credit analysis, relative value comparisons and yield curve considerations.

The historical low turnover of the portfolio (about 20% per year) is an important conservative trait of the program and helps to lower imbedded transaction costs. Securities selected are those, which we feel have the best prospects for significant performance over the next 3-5 years. Morningstar reports (1/6/03) the average turnover of multi-sector bond funds is 156%. The additional cost to the investor is the “hidden” bid/ask spread on buys and sells.

A Trading Network provides all our clients with excellent pricing. We access over 30 institutional broker/dealers seeking competitive bids and offerings; we are constantly searching out the “natural seller/ buyer”. Both the competition among brokers and bigger trades involving large numbers of our clients generally leads to better prices. This advantage could “pay” for the program.

An investment grade (BBB-/Baa3 minimum) average credit rating is achieved initially and is the constant target. Bond ratings at purchase will range form AAA to B. “B” rated bonds are purchased (to a maximum of 33% of portfolio value with each position representing 1% of portfolio value) to enhance cash flow, reduce interest rate sensitivity, and provide greater potential capital appreciation. Downgrades may be held if we anticipate future credit improvement.

The conservative nature of the portfolio is improved through a preference for more seniority; therefore preferred stocks are limited to 15%. Zero coupon bonds are limited to 5% given our preference for more regular cash flow. This conservative bias is more pronounced through the purchase of only fixed income securities. This stands in stark contrast to mutual funds, some of which were recently buying high yielding common stocks (The Wall Street Journal 1/10/03) and convertibles which also have a high equity market exposure.

Portfolios are fully invested with an average maturity in the intermediate range. As such we are “Market Neutral” avoiding interest rate anticipation or market timing. Our focus is on the potential future value of individual corporate issuers based on potential earnings growth and stability over the long term.

Portfolios are diversified. Portfolios contain at least 50 positions. Industry concentration is limited to 20%.

Illiquid and volatile issues are avoided. We purchase only larger size issues of U. S. dollar denominated registered public corporate bonds. North American issuers or those corporations with significant North American assets and operations are considered.

A strict sell discipline is employed. Issues and issuers are analyzed regularly to ensure that gains are captured, relative value is optimized, and capital is preserved.