High Yield Bonds
Management Discipline

Preservation of Capital is considered essential to the objective of the fund, which is total return over a full market/economic cycle. We think it is far easier and safer to beat the “averages” by striving to preserve capital in down markets than by outperforming in up markets. Minimum rating at purchase is B3 or B-. No limit on maximum rating. Downgrades may be held if we anticipate credit and price improvement.

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”. The competition among the brokers for bigger trades involving large numbers of our clients leads to better prices. This advantage could “pay” for the program.

Only Fixed Income Securities (bonds and preferred stocks) Are Purchased. Full-coupon, cash-paying securities are preferred for their cash flow advantage and their usually lower volatility than zero coupon bonds. This conservative bias 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 convertible securities (which behave too much like equities).

The historical low turnover of the portfolio (about 33% 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 turnover of the average of High-yield bond funds is 103%. The additional cost to the investor is the “hidden” bid/ask spread on buys and sells.

A Bottom-up Approach identifies investment opportunities that represent the most attractive value and with strong prospects for consistent income and growth. We believe that this is a more conservative and constructive approach than “top-down” approaches that attempt to time the markets and bet on the continually elusive direction of interest rates.

Continual Research of issues is conducted by the team of portfolio managers. The value investing approach demands regular rigorous credit and industry analysis to identify issues that are overvalued and those that should be sold to reinvest in better opportunities.

Primarily North American Companies are considered as potential investments. There are many opportunities “at home” in markets that we know better than far away foreign countries that appear to be fraught with problems.

A Primary Focus on Established Companies is a key conservative element. For the most part we avoid new companies or “start-ups” like the new telecommunications and internet companies. They lack a track record by which future potential can be estimated, their competitive mettle has yet to be tested and consumer acceptance of their new and possibly untried products an unknown.

Diversification is across more than 30 issues, which means your investment is not dependent upon the performance of a few companies. Additionally, the managers strive to reduce risk by generally limiting industry group exposure to about 15%.

Avoid Small Issues - Liquidity and Safety are Enhanced by investing in only bonds with an initial issue size of $100,000,000. We avoid smaller issues that are generally more illiquid.