Broad Market

Overview

Credit Research & Portfolio Management Process

Long-term investors have enjoyed the benefits of diversifying their bond portfolios. Blending a High Yield bond program with an Investment Grade allocation has lowered overall volatility and increased long-term returns. Our exclusion of lower tier credits (CCC & below*) from the investment consideration results in an approximate allocation of 67% Investment Grade and 33% High Yield mix, which is the constant target of CAM’s Broad Market Program.

The objective is to provide a diversified approach to the corporate bond market that can perform in various environments. A bottom-up approach identifies investment opportunities that represent the most attractive value with strong prospects for consistent income and growth. Liquidity and safety are enhanced by investing only in bonds with an initial issue size generally in excess of $100,000,000. The overall average credit rating objective is BBB*.

The strategy offers extensive diversification with each portfolio containing at least 55 issues. Each high yield position represents approximately 1% of the overall portfolio. In addition, concentration limits within the high yield portion of the strategy are observed to assure appropriate industry diversification. An historical low turnover of the portfolio, on average 30% per year, helps to reduce transaction costs. A Trading Network provides all our clients with best pricing. We access over 30 institutional broker/dealers seeking competitive bids and offerings.

*Nationally Recognized Statistical Rating Organization (“NRSRO”): The Fund uses the S&P rating organization to determine credit quality.

Credit Research chart

Risk Management

Our investment strategy utilizes a bottom-up value discipline. Risk management is an integral part of the investment process. This is important given our primary objective of preservation of capital. In addition to security selection, risk management is employed through portfolio diversification, liquidity and constant monitoring of individual credits. Liquidity and safety are enhanced by investing only in bonds with an initial issue size generally in excess of $100,000,000. In efforts to mitigate risk, the Investment Grade portion of portfolios are constructed with a maximum exposure of approximately 15% per industry.1

Individual credits are monitored continuously; a deterioration of 10%, relative to the index, from initial purchase triggers a mandatory credit review in which appropriate action is promptly determined.

30% limitation to the Financial Institutions within the investment grade universe due to the size of the sector versus the overall market.

Within the High Yield portion of Broad Market

Portfolios are constructed with a maximum exposure of approximately 12% per industry. Additionally, any sector may represent approximately 5% of portfolio value or approximately 125% of the Barclay’s industry sector weighting, whichever is greater. An exception is the consumer sectors which can be weighted up to approximately 150% of the Barclay’s industry sector weighting.

Individual credits are monitored continuously; a security price decline of approximately 15% relative to broader benchmarks triggers a mandatory Credit Committee review. This action will result in a hold or sell decision. Should a price decline by approximately 25% or more, relative to broader benchmarks, that position will be sold.

RELATIVE VALUE

Within Domestic Fixed Income Sectors

The chart provides the annual ranking of various fixed income classes in terms of total return performance.
Over the period of 1992 through 2015, High Yield Bonds were one of the best performing fixed income sectors. Also, in a number of years, their performance ranking is the opposite of that of Investment Grade Corporates and U.S. Government Bonds. Including the asset class in a portfolio provides value both in terms of return potential and diversification.

Source: Credit Suisse & Lipper

Historical Returns

Of Selected Asset Classes

January 1980 - December 2015

ANNUALIZED
TOTAL RETURN
ANNUALIZED
STANDARD DEVIATION1
SHARPE
RATIO2
U.S. 30 Day T-Bill 4.44% 1.05% 0.00
U.S. Intermediate Government 7.91% 6.21% 0.59
U.S. Long Term Government 9.40% 12.18% 0.46
Merrill Lynch Corporate 8.52% 7.40% 0.58
S&P 500 11.52% 16.98% 0.49
Russell 2000 10.63% 21.89% 0.38
High Yield Bonds 9.91% 9.26% 0.63

January 2009 - December 2015

ANNUALIZED
TOTAL RETURN
ANNUALIZED
STANDARD DEVIATION1
SHARPE
RATIO
2
U.S. 30 Day T-Bill 1.33% 2.92% 0.00
U.S. Intermediate Government 3.08% 4.62% 0.39
U.S. Long Term Government 4.66% 12.61% 0.32
Merrill Lynch Corporate 7.31% 4.95% 1.22
S&P 500 14.81% 16.84% 0.87
Russell 2000 14.01% 22.49% 0.66
High Yield Bonds 12.09% 8.79% 0.68

Source: Credit Suisse Strategy Monthly, December and 2015 Leverage Finance Performance Review

1 Standard Deviation – measure of dispersion from the mean.
2 Sharpe Ratio – measure of excess return per unit of risk assumed. The unit of risk is measured by standard deviation. Higher Sharpe Ratio indicates has provided a better risk/reward.