Loomis Sayles Bond Looks Across the Pond
Few investors would describe the past year’s markets as exciting, except perhaps the folks at Loomis Sayles Bond (symbol LSBRX). That’s because the fund’s four managers -- Dan Fuss, Kathleen Gaffney, Matt Eagan and Elaine Stokes -- appreciate value and take a long-term view. “We all enjoy the ups and downs of the markets,” says Gaffney. “There’s always something fresh and new to learn with each new cycle.”
Their go-anywhere, deep-value approach -- the “only way” they know how to run a fixed-income portfolio, says Gaffney -- has produced outstanding results. Over the past ten years through June 13, Loomis Sayles Bond returned a hefty 9.6% annualized -- an average of nearly four percentage points per year better than Barclays Capital U.S. Aggregate Bond index, a measure of the broad U.S. bond market. Year to date, the fund has returned 4.8%, compared with 2.3% for the index.
Of course, there have been bumps along the way. In 2008, a heavy weighting in medium- and low-quality corporate bonds dragged the fund down 22%. Loomis lagged the Barclays index by 27 points and the average multi-sector bond fund by seven points -- a considerable shortfall for a bond portfolio. Some might say 2011 was another bump. The fund’s 3.5% return that year was below average for its peer group. A big reason: The fund didn’t own Treasuries then (and it doesn’t own any now). And those bonds rallied strongly in the second half of last year as investors, mostly institutions, piled into bonds that they perceived as super-safe.
Short-term shortfalls, however, don’t trouble the Loomis managers. “We never manage for the year-end bull’s eye,” says Gaffney. “I learned a long time ago from Dan that if you want to be at the top of the performance roster long term, you’ve got to spend some time being very uncomfortable at the bottom.” (Fuss launched Loomis Sayles Bond in 1991. Gaffney, who joined Loomis in 1984 as a bond and stock trader, became co-manager of the bond fund in 1997; the other two came on board in 2007.)
Lately, the quartet have been busy building a portfolio that’s poised for a coming rise in interest rates and a solid U.S. economic recovery. In their view, the best place to do that these days is, surprisingly, Europe. “We’re scurrying around and finding lots of opportunity there,” says Gaffney. The managers have been unloading U.S. corporate bonds to make room for investment-grade European bonds, such as utility-company issues in Spain, Italy and Portugal, as well as some financial-company debt. They’re betting that these bonds, with yields of about 6.5%, will outperform the overall bond market once interest rates begin to rise. “They’re the perfect investment right now,” says Gaffney.
She and her colleagues continue to find value in junk bonds. And they’ve picked up convertible bonds in blue-chip U.S. companies, such as Ford and Intel. These companies “have the ability to increase their dividend and gain share in the global economy,” Gaffney adds. The convertibles -- which are essentially part bond and part stock -- and issues denominated in foreign currencies helped Loomis Sayles Bond chalk up a scintillating first-quarter gain of 6.5%.
A look at the fund’s top ten holdings reveals a mix of investment themes. Among the list are a few convertibles, Canadian and Norwegian government bonds, and even shares of Intel. U.S. stocks, says Gaffney, are attractive and “fair to perhaps cheap” these days. Nearly 6% of the bond fund’s assets were in common stocks at last report. Gaffney says the last time the fund’s allocation to stocks was as high was in the mid-to-late 1990s. It will go even higher: Loomis Sayles Bond can invest up to 10% of its assets in stocks, and Gaffney says she expects the fund will “go up to the max” in the coming months.
Keeping track of such disparate asset classes may seem a tall task, but it’s what makes this fund unique. The managers have behind them a veritable army of analysts, researchers and traders. The entire team, led by Fuss, meets every morning. Gaffney says that when she joined the firm nearly three decades ago, those meetings had just five attendees -- Fuss and four traders. Today nearly 40 traders, fixed-income researchers and analysts show up, along with the managers. The firm is rich in research, Gaffney says. “It’s what provides the breadth and depth of our work, and it allows good ideas to bubble up.”
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