Purpose and Mandate

Crossover fixed income management for taxable investors seeks to:

• Generate attractive risk-adjusted after-tax yield/cash flows by identifying value across both taxable and tax-exempt markets
• Maintain appropriate degree of flexibility in portfolio to take advantage of future dislocations
• Make investment decisions in context of client-specific tax profile
  e.g., state tax, AMT, tax attributes of other portfolio assets, etc.

FPCM approach to managing crossover portfolios

• Guiding principle: each investment decision has goal of achieving appropriate risk-adjusted yield on after-tax basis
• Exploit unique tax attributes of tax-exempt bonds
• Minimize frequent trading of securities common in portfolios with total return benchmark

Generate alpha through opportunistic trading across fixed income markets

Dual mandate to maximize returns while reducing amount of risk in portfolio

Exploit relative value opportunities through expertise in rates, volatility, mortgage, corporate credit, municipal, structured credit and ABS markets

• E.g., Hedged Agency MBS, Long/Short Credit, Hedged Municipal, Volatility
• Take advantage of price discrepancies across fixed income markets

FPCM manages customized fixed income strategies for our clients across various market sectors

• Customized portfolios are linked to specific investment goals and mandates
• Not about beating a generic index

First step for FPCM is to consult with client to understand:

• Natural exposures (state of domicile, industry) and exposures inherent in operating business
• Tax status: current and anticipated
• Explicit and implicit liabilities: risk tolerance, liquidity, investment horizon, uncertainties
• Overarching targets and goals: preservation of capital, yield, cash flow, etc.

Key value contribution of FPCM is appropriate guideline construction

• Most risk contained in guidelines/benchmark
• Manager expertise critical to incorporate sufficient flexibility while achieving client objectives
• Preferable to revise strict guidelines over time than to draft overly broad guidelines at the outset

Finding and monetizing value

• FPCM has a strong fundamental bias and long term investment horizon
• With expertise across markets, indentify benefits and risks of comparable instruments
• Each investment decision has goal of achieving appropriate risk-adjusted yield for the client portfolio

FPCM will work with its client to assess and manage those risks that arise due to mismatches between the asset and liability sides of the balance sheet

• Assess risk discrepancies and gauge client tolerances/preferences
  • Risks common to a particular industry or sector
  • Risks unique to that client’s situation
• Establish prudent and suitable risk management guidelines
  • Performance and compliance benchmarks
  • Asset allocations and liquidity
  • Metrics to monitor status and changes to identified risks
  • Guidelines for suitable management strategies including derivatives-based hedges
  • Data verification and compliance

FPCM will provide ongoing advisory

• Verify compliance with guidelines
  • Independent verification of performance, risks and effectiveness
• Monitor counterparties
• Review changes that may require guidelines adjustments:
  • Liability profile seasoning and experience
  • Significant market environment changes