CAM Newsletter

In our last newsletter we touched upon themes that were prevalent in the credit markets through 2008 and identified some developing themes for 2009. We update and add to these in our First Quarter Newsletter. In the 4Q 2008 issue we highlighted:

Q1 saw the continuation of the de-leveraging that took place in the last half of 2008. This trend will continue to drag GDP. The appetite for riskier assets increased during the first quarter of 2009 as illustrated by the healthy new issuance that took place in both the investment grade and high yield markets. The 1Q 2009 saw $251.8 Billion of new investment grade debt issued along with $11.2 Billion in new high yield debt. More than 50% of the investment grade issuance had no Government backing, and less than 50% of the high yield issuance represented refinancing of existing term debt. Even with near historic wide spreads, issuers in the high-grade market looked to lock in relatively cheap after-tax financing costs as well as to extend debt maturities. The high yield market was also open for the “right” issuers (most of the issuance took place in BB & B–rated credits). But the access came at a high cost with an average yield spread of 960 bps for BB & 1462 bps for B-rated bond issues. Investors in both markets took advantage of the attractive relative yields in this absolute low yield environment. So it appears that the government programs intended to lower home mortgage rates and other government “risk free rates,” like Treasuries, caused investors to avoid those artificially low yields and look to corporates for higher yields and potential price upside.

During the quarter, it also became evident that business conditions in the fourth quarter of 2008 had deteriorated faster than anticipated (GDP at –6.3% was shocking). So forecasts have deteriorated: 1Q at –5.0%, 2Q at –1.9%, 3Q at +0.2% and 4Q at +1.4%. The change in conditions and the outlook has caused more companies to try to deleverage.

One common method to reduce leverage is a debt for equity exchange. Ford completed one this quarter, substantially reducing their debt load. Another method is a straight tender for debt, which has been utilized by several corporations

during Q1. We have seen an increase in the use of both methods during the quarter and expect to see more during 2009. Straight tenders for debt trading at significant discount to par is a hugely cost effective way for companies to deleverage their balance sheet. RH Donnelley, Clear Channel and MGM Mirage are notable examples.

The disarray in the finance sector has also contributed to a more proactive stance by companies looking to re-capitalize. As a result, some of those companies that overleveraged relative to the new economic realities have chosen to accelerate the bankruptcy process to preserve assets and remaining cash. Nortel, for example, entered bankruptcy recently with $2.5 billion in cash. While they might have made it through, one alternative was a potential liquidation within a year if business conditions remained depressed and access to capital scarce - for management a most unpalatable option which had a higher probability of occurrence given the very cautious lending attitude exhibited by both investors and banks.

The continuance of depressed debt prices has provided the opportunity for some opportunistic investors to “game” the system. This has been somewhat disruptive to the re-capitalization process. A popular trade that has been utilized is the purchase of debt at $.30 on the dollar with an offsetting purchase of a CDS agreement at an aggregate cost of $.30, thus creating a net hedged position of $.60. In the cases of issuers with equity outstanding, a respective short position is created. The goal is to put downward pressure on the enterprise value of the company with the hope of triggering a technical default, i.e. a violation of a covenant such as minimum net worth, resulting in a payment close to or at par or, minimally, a fee to amend the covenant.

As expected, defaults increased throughout the quarter with some large notable issuers such as Nortel, Trump Entertainment, Circuit City, Linens & Things and Charter Communications filing for bankruptcy. As we go to press, the largest ever real estate bankruptcy occurred. General Growth Properties, the 2nd largest mall owner behind Simon Properties and owner of over 200 malls defaulted on over $27 billion. The U.S. domestic speculative grade default rate rose to 5.7% (trailing 12 months) and is projected to peak at 14.1% by year-end, according to Moody’s. The “silver lining” is the default projections decreased by 1.20% from their December highs.

We, too, believe that defaults will increase. The heightened concern is reflected in bond pricing across the entire credit quality spectrum from AA-rated GE, to BBB-rated Alcoa, to CCC-rated MGM Mirage Casinos. It is important to note that historically the majority of defaults occurred in bonds rated CCC and lower. So avoiding this subsector in the past has reduced the risk and incidence. Many of the higher credit quality companies (BB and B rated) appear to have manageable leverage and sound business models. From a risk/reward perspective, we feel that investors in well diversified and conservatively managed portfolios are being well compensated for risk given average high-yield bond yields approaching 18%.

It is important to note that many companies are attractive high-yield and high grade investment candidates. Although, there have been a number of positive events for many well established companies and those with better credit quality, some highly leveraged companies with excellent business plans or unique products or market niches have had some financing success.

HCA (largest hospital chain) just refinanced $1.5 billion in bank debt through a public 8.5% bond offering. Credit ratings were recently upgraded on the debt of Dollar General (discount stores), Lamar Media (billboards), XM Satellite Radio and RockTenn (packaging). Globally in 2008, while there were 900 companies with credit rating downgrades, over 450 companies had credit quality upgrades (Standard & Poor’s).

The high yield market will, undoubtedly, remain volatile. Credit rating changes will continue to be weighed on the downside – 21 companies with $48 billion in debt became “fallen angels”. They were downgraded to high yield from investment grade during the first quarter. This compared to 2008’s total of 27 downgrades with $56 Billion in debt. Historically, above average performance of the high yield universe has begun 3-months prior to the end of a recession (Barclays) that coincides with the peak of defaults (Moody’s).

In the Investment Grade Universe, over $100BB of Baa3 and/or BBB- rated bonds are on negative watch for downgrade. So credit deterioration is forecasted to continue. However, given the significant premium yields available in the Investment Grade and High Yield Universes, we believe that there are excellent opportunities in both those Universes at the present time. Careful selection, analysis and diversification are paramount.

· Credit markets continue to thaw with over $250 BB Investment Grade and $11 BB High Yield offerings reaching the market during the1st quarter.

· Recent demand for High Yield enables HCA Inc. to upsize a BB-rated offering to $1.5 billion at a 624 spread to Treasuries. This is the largest deal since last summer.

· Single A rated bonds see spreads to Treasuries tighten: 491 bps at March 31 (and the 571 bps high in Nov 08) to 442 bps at April 15.

· Historically high yields and wide spreads in the Corporate and High Yield markets continue to offer exceptional opportunities.

· Yield Curve Steepens as Liquidity Builds in the Banking System. Short term debt yields paltry.

* All clients benefit from institutional trading platform & multi-firm competitive bids &

Performance Review 3/31/09

Through March 31, our Investment Grade Corporate Strategy has bested its benchmark Barclays Corporate Index for the 3 months, 1,3,5 & 10 years. Our High Yield Strategy trailed the Barclays High Yield Index for the quarter but exceeded that benchmark for the 1, 3, 5 & 10 years. Our Broad Market portfolio (blending the Investment Grade and High Yield strategies), slightly trailed its weighted benchmark for the quarter, but exceeded it for the 1, 3, 5 & 10 years. The Short Duration Strategy also trailed its benchmark for the 3-months, but outperformed for 1 & 3 years and since inception. Regarding relative performance to mutual funds, our inclusion of only corporate bonds in our Investment Grade Strategy resulted in our performance for the quarter and 12-months being in the bottom quartile of the General Bond Intermediate Term peer group (Morningstar data, New York Times, April 12, 2009) and in the upper portion of the third quartile for the 5 years. These funds have exposure to Treasury and Agency Bonds, which significantly outperformed corporates during the past 24 months. In the last weak economy, 2000-2002, government bonds outperformed corporates and high yield bonds. However, in 13 out of the past 18 years, corporates have outperformed Government and Agency bonds.

The Broad Market Strategy (our corporate core plus strategy) ranked in the upper half of the third quartile for the quarter, in the upper half of the first quartile for the 12 months, and in the bottom half of the second quartile for the 5 years.

The High Yield Strategy ranked in the upper half of the third quartile for the quarter and in the top half of the first quartile for the 12 months and for the 5 years.

The Short Duration Strategy (our short maturity corporate core plus strategy) ranked in the top half of the third quartile for the 3 and 12 month periods. Inception of this Strategy was 58 months ago.

Our Strategies are most appreciated in and near economic slowdowns and recessions when corporate profits decline and investors’ credit quality concerns mount. Our unrelenting preference for financial strength over yield has provided good relative risk adjusted returns most suited for the conservative investor.

The chart to the right shows that the higher credit quality tiers of the High-Yield Bond Market (BB & B-rated bonds) significantly outperformed the lower quality tiers CCC and CC&D-rated tiers for the longer term, with the lowest category experiencing negative returns for all periods. Also, BB-rated bonds slightly trailed the Barclays US Aggregate Bond Index over the 10 year period and outperformed that Index over the 20 year time period. So a decision about a high-yield allocation in a bond portfolio should involve the more exacting consideration of allocation to specific credit ratings rather than simply to the high yield market.

The second major point of the chart is the comparison of the 5-year performances. As the High Yield market struggled during 2008, the CCC category was most dramatically impacted. For example, at June 30, 2008, the 5-year return for CCC had been 8.33%; by year end, as is presented in the chart, that performance became a negative 6.77%.

Finally, BB-rated bonds outperformed S&P 500 for all periods, B-rated bonds had similar results. With about half the volatility of the S&P 500 (Ibbotson), better credit quality high yield bonds deserve consideration as a significant and “core” or permanent asset class allocation.

Investment Grade Corporate Bonds Enjoy Significant Credit Spread to Treasuries. High Yield has Best Quarter since 2003.

The Investment Grade Index was slightly negative during the quarter (Barclays Corporate Index down 1.29%), and spreads widened slightly from year end, closing at levels near their historic highs for the last two decades. High Yield Bonds, up 5.99% for the quarter, had their best quarterly performance since 2003, as spreads tightened marginally from year end.

Credit Rating	1986-1Q2009 average spread*	3/31/09	12/31/08	High Yield at 5/31/07 Tightest this decade
A	1.01%	4.91%	4.67%	N/A
BBB	1.63%	6.56%	6.73%	N/A
BB	3.49%	9.03%	10.93%	1.76%
B	7.48%	13.50%	16.59%	2.48%
CCC	12.95%	30.37%	32.79%	4.75%

Credit Rating (Source CSFB)	1986-2007 average	9/30/07	7/27/07	7/20/07	5/31/07 Tightest this decade
HY Index (domestic)	554	423	421	337	271
Premium to Treasuries	94.5%	97.4%	89.9%	67.9%	55.3%
BB	364	281	302	234	176
Split BB	473	320	338	264	192
B	539	414	402	318	248
CCC	1,203	735	706	584	475
CC & Lower	1,550	2,121	1,167	1,052	1,350

Sharpe Ratios (risk & reward relative value)1989-2009 Q-1

CAM Broad Market Strategy .61

CAM Investment Grade Strategy	.60	CAM High Yield Strategy	.33	CAM Short Duration	.43
Barclays U.S. Corp Index	.51	Barclays High Yield Bond Index	.23	(weighted 50% HY and 50% IG)

One measure of our conservative philosophy is the Sharpe Ratio (from Firm inception 4/89 through 3/09) that measures total return per unit of risk assumed. This relative return measure is as important as, if not more important than, absolute return comparisons. Our constant objective is to deliver a good return with much less risk. These relative measures show our performance of our strategies to the benchmarks for Investment Grade, High Yield and Broad Market (corporate core plus). Our High Yield Strategy has produced a Ratio almost 50% greater than the Index. The Short Duration Strategy has been impacted by its larger allocation to short maturity financial issues which were extremely volatile. As the volatility subsides, this anomaly should reverse.

Of note is our Investment Grade 100% corporate bond portfolio performance relative to the broader Barclays Intermediate Aggregate Index which is about 2/3 Treasury and GSE (Agency) bonds. So, in the investment grade sector, a portfolio comprised of 100% corporates could be considered preferable to one which includes Treasuries and Agencies.

Spreads to Treasuries by Credit Rating

Shows significantly lower risk of BB and B rated bonds

Source: CSFB

Rating	BB	B	CCC	CC/C
Avg Spread	349	788	1,295	2,579
Std. Dev.	99	158	669	1,250
12/31/08 spread	1,093	1,659	3,279	3,208
Tightest 5/31/07	175	248	398	1,213

The CAM High Yield, Investment Grade and Short Duration composites consist of all discretionary portfolios under management, including all securities and cash held in the portfolios, and has been appropriately weighted for the size of the account. All accounts are included after they are substantially invested.

The Investment Grade performance prior to January 1, 1993 represents Mr. Hale’s investment management performance while managing his previous employer’s insurance company’s fully invested “higher grade” fixed income portfolio adjusted to net the highest CAM management fee of 25 basis points per annum from the total returns.

Returns are calculated monthly and include reinvestment of dividends and interest. Past performance is no guarantee of future results.

When compared to mutual funds’ performance, CAM results are after deduction of all transaction costs and CAM advisory fees. CAM advisory fees used is the composite average. Accounts managed through brokerage firm programs usually will include additional fees. “Net of fees” herein refers only to CAM’s management fee. Returns audited annually. Most recent audit available upon request.

Mutual fund averages and S&P 500, as published quarterly in Barron’s as supplied by Lipper Analytics.

The indices and information shown for comparative purposes are based on or derived from information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

High yield bonds may not be suitable investments for all individuals. Before investing a thorough reading of all materials and consultation with an independent third party financial consultant may be appropriate.

This material was not intended or written to be used, and it cannot be used, by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws.

This information is intended solely to report on investment strategies and opportunities identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell of any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Fixed Income securities may be sensitive to changes in prevailing interest rates. When rates rise the value generally declines. For example, a bond's price drops as interest rates rise. For a depository institution, there is also risk that spread income will suffer because of a change in interest rates. The Indexes are referred to for informational purposes only and the composition of the Index is different from the composition of the accounts included in the performance shown above. Index returns do not reflect the deduction of fees, trading costs or other expenses.

CAM's Key Strategic Elements

Performance Review 3/31/09

CAM Broad Market Strategy .61