The Northern Income Equity Fund Combines Convertible Bonds with a Value-Driven Approach to Stock Selection

Five years on from the global financial crisis, no one needs to be reminded about the importance of risk management.

But Jackie Benson, veteran portfolio manager of the Northern Income Equity Fund, is glad to do so anyway.

“Risk is a natural part of investing, but there are strategies that could reduce it,” she said. In the case of the Northern Income Equity Fund, those strategies include a disciplined and unwavering sensitivity to valuation, avoiding large sector bets, and including a healthy dollop of convertible bonds in a mostly stock portfolio.

Growth objective
Yet, Benson is careful to note that despite a roughly one-third allocation to convertible securities, the Fund is not designed for investors whose sole objective is income.

“We are first and foremost an equity fund,” she said. “We don't make guarantees, but we strive to generate an equity-like return with less volatility. And over the almost nine years I've been with the Fund, I'm pleased with the results.”

According to Benson, the Fund's income stream is mostly a means to an end, a potentially stabilizing factor in skittish markets.

In keeping with the Fund's equity focus, Benson seeks to identify convertibles that display more sensitivity to movements in the underlying stock than to the direction of interest rates. That criteria could be particularly pertinent as the Federal Reserve normalizes monetary policy, which may put upward pressure on bond yields.

“The convertibles we buy display an asymmetric return profile,” she said.

Translated, that means that the bonds (or convertible preferred stocks) might be expected to capture more of the underlying common stock's upside than its downside.

Thinking longer term
Naturally, Benson recognizes that the Fund's intense focus on risk management might come at the expense of the Fund's overall performance results.

“We aren't trying to beat a benchmark by a wide margin over a brief period,” she said. “We're long-term investors in securities that we think give our shareholders a chance to outperform over market cycles, with less of the volatility that could cause them to shy away from the inflation protection that stocks might offer.”

Whether you're managing players on a baseball team or risk in a mutual fund, that kind of double play is easy to appreciate.


Past performance is no guarantee of future results.

Equity Risk: Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.

High Yield Risk: Although a high yield fund's yield may be higher than that of fixed income funds that purchase higher-rated securities, the potentially higher yield is a function of the greater risk that a high yield fund's share price will decline.

Interest Rate Risk: Increases in prevailing interest rates will cause fixed income securities, including convertible securities, held by the Fund to decline in value.

 
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