Keeping Its Options Open
The Northern Income Equity Fund Seeks Income and Growth, With Less Volatility, by Investing in a Combination of Dividend-Paying Stocks and Convertible Bonds


July 2010

When you’re out for a drive on a warm, sunny day, it’s nice to fold back the top if you have that option. Then, if the weather turns bad, you just raise it back up and stay warm and dry.

“Convertibles give you that flexibility,” says Jackie Benson, portfolio manager of the Northern Income Equity Fund. And though Benson is referring to convertible bonds, not sporty four-wheelers, the concept is similar.

It is all about having flexibility to take advantage of the situation.

Flexibility could be especially important in today’s volatile markets, which reflect the unsettled global economic environment.

Not that risk management is ever as simple as flicking a switch.

“A lot of thought and care go into it,” says Benson. “But the more tools at your disposal, the better your chances of avoiding trouble while keeping the door open to attractive opportunities for capital appreciation.”

Safety features
Benson says that income-producing securities often are less volatile than their growth-only peers. You might say that Benson’s convertibles come equipped with side airbags and anti-lock brakes.

The Northern Income Equity Fund invests at least 80% of assets in a combination of dividend-paying common stocks or bonds that are convertible into stock.

“Convertibility could give us the best of both worlds,” she says. “The chance to generate equity-like returns but with potentially more income and less volatility. We don’t make guarantees, of course, but that is pretty much what the Fund has been able to accomplish over time.”

Broad appeal
Benson constructs the portfolio as if it were a straight equity fund. She begins by looking for solid businesses whose share prices appear cheap.

“If we like the company, the common stock versus convertible bond issue is a secondary consideration.”

Still, she will dig deeper into each company’s capitalization structure to determine if it offers convertible securities on terms she likes.

“The income level and upside/downside ratio of a convertible bond has to be in our favor or we’ll walk away,” Benson says.

The Northern Income Equity Fund’s objective of generating capital appreciation through a blend of income-producing securities makes it appropriate for a broad range of people.

“More aggressive investors may like the Fund’s growth potential while conservative clients may appreciate the income and downside protection it could provide,” Benson says.

A nice combination, rain or shine.

Past performance is no guarantee of future performance.

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/Maturity 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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