Advertisement
investing

Loomis Sayles Bond Preps for Rising Interest Rates

The managers of this Kip 25 fund own a lot of junk bonds and foreign debt and even a few dividend-paying stocks.

The managers at Loomis Sayles Bond (LSBRX), a member of the Kiplinger 25, appreciate good values and have the latitude to go anywhere to find them, whether it's in fixed-income securities, convertible bonds, bank loans or even common stocks. But the managers — Dan Fuss, Elaine Stokes and Matt Eagan — also have to keep an eye on the bigger picture. These days, with yields near historical low levels across nearly all types of bonds, they're building a portfolio that's poised for a rise in interest rates.

The managers continue to find deals in high-yield corporate bonds, which account for 19% of their fund's assets. And about one quarter of the portfolio is invested in securities that are issued in foreign currencies, such as Mexican pesos, Australian dollars and Norwegian krone. One purchase in 2012: Morgan Stanley bonds issued in Australian dollars. Those particular securities pay a yield of 8%, which is higher than the U.S. dollar-denominated Morgan Stanley bonds also held in the portfolio. Finally, the fund has acquired some convertibles (bonds and preferred stocks), straight preferred stocks and common stock of high-quality dividend-paying companies, such as Intel and Bristol-Myers Squibb. "If rates head up," says Stokes, "that's generally good for equities."

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Stokes and her cohorts have been right about many things in years past, as their long-term record shows. Over the past decade though February 15, Loomis Sayles Bond returned an annualized 9.7%, an average of 4.6 percentage points per year better than Barclays U.S. Aggregate Bond index, a measure of the broad U.S. bond market. Over the past year, the fund earned 10.8%, beating its bogey by a whopping 8.1 points.

[EMBED TYPE=POLL ID=22730]

But there have been a few bumps along the way. In 2008, a heavy weighting in corporate bonds dragged the fund down 22.1%. That year, Bond lagged the Barclays index by 27.4 percentage points. In 2011, the fund returned 3.5%, lagging the index by 4.4 points. The main culprit this time: almost no Treasuries in the portfolio. Those bonds rallied strongly in the second half of 2011 as frightened investors piled into what they perceived to be the safest IOUs on the planet.

Advertisement - Article continues below

Another bump came in 2012: In October, Kathleen Gaffney, a 28-year Loomis Sayles veteran and a co-manager of the Bond fund, resigned from the firm. She left to join Eaton Vance and to lead a team of portfolio managers for a group of new multi-sector bond funds. Gaffney often handled calls from reporters and thus, to people outside the firm, she appeared to be a prominent voice at Bond.

But her departure isn't reason to sell shares in the fund right away. She was one of Bond's four managers, and for the past ten years, the fund has moved from a portfolio-manager-focused investment process to one that's more team-oriented, says Jae Park, Loomis's chief investment officer. Fuss, who is 79, launched Bond's institutional share class in 1991 (the retail share class came in 1996). Stokes, who has been with the firm for 25 years, and Eagan became co-managers in 2007. The fund's real team, however, stretches beyond the managers to the 40-odd traders, fixed-income researchers and analysts who help in the analysis, purchase and sale of fixed-income securities.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

No one on the team expects rates to rise rapidly in the near future. Loomis expects the yield on ten-year Treasury bonds — 2.0% on February 15 — to reach 2.25% by year's end. (Kiplinger's forecast is the same.) Stokes adds that the firm expects the slow-growing economic environment to continue in 2013, with little inflation. Stokes says the country's deficit problem is a risk, one that may take a decade to iron out. The process, she says, "is going to be long and slow." Other issues nag the managers, too. Continuing volatility in emerging markets and political tension in the Middle East could pose problems. And there's the worry that China, which has stabilized and will post better economic growth numbers this year, can grow without government support.

The topsy-turvy economic and political world combined with low yields and the threat of rising rates and inflation makes the job of picking bonds challenging. Stokes, Fuss and Eagan buy with a long-term view of three to five years. But, says Stokes, "no single bond sector is cheap these days."

That's what makes the dig-deep research of Loomis Sayles Bond so appealing. "This is not a time for an index bond fund," says Stokes. "Look for bond funds that are flexible in what they can invest in, and look for managers who do their credit work."

Advertisement
Advertisement

Most Popular

8 Things You Must Know About Retiring to the Carolinas
retirement

8 Things You Must Know About Retiring to the Carolinas

From the mountains to the beaches, North Carolina and South Carolina offer retirees plenty of incentives.
August 14, 2020
What Trump's Payroll Tax Cut Will Mean for You
Tax Breaks

What Trump's Payroll Tax Cut Will Mean for You

President Trump issued an executive order to suspend the collection of Social Security payroll taxes. How much could it save you?
August 13, 2020
7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020

Recommended

The 7 Best Funds for Beginners
mutual funds

The 7 Best Funds for Beginners

New investors have it better than ever. The best mutual funds and ETFs for beginners feature no minimum investments, dirt-cheap fees and broad market …
July 30, 2020
Metropolitan West Corporate Bond Has a Bright Future
Making Your Money Last

Metropolitan West Corporate Bond Has a Bright Future

This new-ish corporate bond fund is comanaged by familiar faces.
July 23, 2020
Oakmark International Disappoints Us
Kip 25

Oakmark International Disappoints Us

When this fund is good, it shines relative to peers, but when it is bad, it fares far worse.
July 23, 2020
Protect Your Portfolio From Inflation
Financial Planning

Protect Your Portfolio From Inflation

It’s not an immediate threat, but some warning signs say to set up some defenses now.
July 23, 2020