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Mike Richman, 40/86 Advisors

20 Feb 2004

Richman is a v.p. and manages the CONSECO Funds Group Fixed Income Fund.

Richman is a v.p. and manages the CONSECO Funds Group Fixed Income Fund. This asset management arm of Conseco recently changed its name to 40/86 Advisors, which is a reference to the state of Indiana's longitude and latitude.  

What is your investment philosophy?

We are a bottom-up shop. We take a fundamental approach to analyzing credit and specifically we have 20 analysts that cover different sectors and look at companies within those sectors to base our valuation. This year, we have liked the cable/media sector. There are a lot of good things going on in the sector. It displayed a bit of pricing power in 2003 and is continuing to build on those trends. Companies in the sector are doing a good job of fixing their balance sheets and improving them by paying down their debt.  

Speaking of media, what is your reaction to Comcast Corp.'s bid for Walt Disney? Do you draw any lessons from the Time Warner-AOL merger?

It would be a good acquisition by Comcast if they control not only the distribution but also the content. This is different from the Time Warner-AOL merger because Disney is a respectable company with some respectable content, though it has not been doing well in recent years. There is more content here than anything AOL had. 

Back to your investment philosophy, can you elaborate on the bottom-up approach?

We have a proprietary process and we depend on our in-house research. While we look at credit ratings, we depend on our analysts' research and recommendations on a credit. Our analysts are in constant communication with managements. They are able to find undervalued bonds to invest in.  

Does that mean a credit rating is not a determining factor? Do you invest in bonds with low credit based on your analysts' recommendations?

Sure, we would invest in low-credit bonds if our analysts think they are undervalued. We look at all ratings and all classes and all credit qualities. One of the unique qualities of our analysts here is that they do the entire spectrum--both investment-grade and high-yield. This, we believe, gives them a great perspective not only of the company but the whole sector and/or an industry.  

What is your current investment strategy?

We are overweight on corporates and we think they will continue to do well. As the economy improves, the companies will continue to surprise with their earnings. We continue to like corporates even though the spreads have tightened.  

Do you think economic recovery and faster growth in 2004 could affect bond prices?

While the economy will recover and continue to, we do not expect inflation to pick up. We believe investment-grade bonds will be an attractive investment.   

How does Alan Greenspan's recent report to Congress affect your investment strategy?

The Fed chairman's comments show that interest rates are going to be range-bound for sometime and that the Fed is no hurry to raise interest rates. This has confirmed our assessment that the economic recovery will not lead to inflation. In response to the Fed's patience, we are putting the plan to shorten the duration of our fund on hold. We have gotten back to slightly shorter than the benchmark, which is the Lehman Brothers Aggregate Bond Index. We manage duration-neutral and are about just 2% short the index. We are underweight on mortgage-backed securities because we believe mortgages are not going to have a great year. But, we will continue to be overweight on corporates.  

What is the current composition of the fund?

It is 50% in corporates, 12% of which is in high-yield. Elsewhere, 10% is in municipal securities, 10% in commercial-mortgage backed securities, 10% in asset-backed securities and 5% is held in collateralized mortgage obligations. The remaining 15% is made up of Treasuries and cash. As we expect interest rates to be range-bound in the foreseeable future, we will continue to maintain our overweight on corporate bonds. We certainly don't think mortgage-backeds are a good investment.

20 Feb 2004