Strategy Descriptions

LIBOR Plus Strategies: The typical benchmarks are 1- or 3-Month LIBOR. The universe of assets is primarily senior class ABS and CMBS, corporate issues and CMO’s. The strategy seeks to add value through security selection and sector rotation. Yield curve positioning relative to benchmark can be a secondary source of return. Portfolio duration typically is limited to 1-12 months.

Active Core Strategies: The composition of the portfolio reflects the assets in the benchmark: corporate bonds, MBS, ABS, CMBS, Agency issues, U.S. Treasuries and REMICs. From this universe, we construct granular portfolios that are highly diversified by issue, obligor, sector and sub-sector. Portfolio duration and partial duration exposures generally are close to the benchmark. In Active Core, security selection is the driver of performance, thus our investment process is focused on bottom-up analysis of assets in the corporate, structured credit and MBS sectors. The decision to buy or sell an issue reflects an integration of fundamental research, technical inputs and quantitative analysis.

Absolute Return Strategies: These portfolios are the platform for our best ideas given the flexibility in investment guidelines and the ability to buy protection or hedge market-related volatility. Absolute return strategies invest in a wide universe of securities, both long and short. In some mandates, leverage may be employed. Within the allocations to structured credit, we tend to invest at the less levered, senior portions of the capital structure, which provides a margin for error if there is slippage in our models or forecasts. We favor securities that are complex or idiosyncratic, areas where in-depth analysis and focused, proprietary research and modeling give us conviction and competitive advantage.

Corporate Credit Research Process

Our corporate credit research process is bottom-up oriented with research driving the relative-value determination. At the issuer level, the foundation of our process is a corporate credit scoring system. The corporate credit score is the sum of two components: fundamental and qualitative.

• Fundamental Score may range 1-5 for each issuer. The Fundamental score is driven by industry-specific credit metrics and ratios which look out over an issuer’s next 12 months.
  
• Qualitative Score may range 1-5 for each issuer. The Qualitative score is driven by an assessment of the issuer's management quality, financial policies, strategic analysis and event risk.

• Specifically, DecMetrics is our proprietary, Merton-based modeling tool. Inputs are an issuer’s equity valuations and equity volatility and pro forma leverage metrics. Outputs are an implied CDS curve, implied ratings, and an expected default frequency.

Structured Credit Research Process

In ABS and CMBS, the research process covers issuer, servicer, collateral and issue structure. We form an opinion regarding the issuer and servicer based on several criteria: an evaluation of their unsecured credit by our corporate credit analysts; an assessment of the issuer’s personnel, experience and underwriting practices; loss mitigation practices; systems development and utilization; and regulatory compliance.

The analysis of collateral at the loan level is focused on key factors which affect default and severity outcomes: effective Loan-to-Value, the quality of underwriting in the pool, geographic concentration, loan age, property type, borrower quality, rate reset shocks, and other variables. Stress runs are based on home price change scenarios, the underwriting policies of the issuer, and deal vintage.

The analysis of issue structure seeks to quantify the tenor of the security and identify how loan-level losses may affect cash flows on the notes we may purchase. We review the transaction’s structural characteristics including credit enhancement, loss or delinquency triggers, cash flow waterfall, and allocation of losses.

Risk Management

In each strategy, we seek to control portfolio volatility in “normal” and “shock” regimes. In long-only core products, we measure portfolio volatility against the benchmark given client risk budget preferences. In LIBOR based and alternative products, we focus on portfolio tracking error versus risk budget, as well as the probabilities of generating sub-Libor or sub-zero returns in a given month, quarter or year. As a bottom up manager, our risk management process centers on the probable effects of security-specific exposures (long or short positions).

For risk and portfolio management, we use various databases and a proprietary management infrastructure (“Unity”) as our platform. External sources for data, research and third party risk systems include Bloomberg, Lehman Point, Yield Book, Capital IQ, Loan Performance, ABSNet, Intex, Trepp, Real Point and others. We use these systems to obtain risk measures, run cash flows, analyze deal structure, model default frequencies, aid in compliance testing and in surveillance monitoring.