Dan Fuss

Loomis Sayles Bond Fund

by Marla Brill
MFI Publisher

Part II: A Late-Year Recovery?
click here for Part I

The turnaround in performance that Fuss is looking for will depend largely on whether the economy is in for a solid recovery, a soft landing, or a hard thump later in the year. With its heavy emphasis on bargain bonds, Loomis Sayles Bond Fund obviously would be best served by a recovery.

To help understand why he thinks that’s likely to occur later this year, Fuss harks back to 1958, a time that he says bears a striking resemblance to what’s going on today.

"I was just getting out of the Navy," he recalls. "The post-war economic boom had come to a grinding halt. For the first time since World War II, companies just stopped spending money to build and expand. The capital spending boom had turned into a capital goods recession." By the time the 1960 presidential elections rolled around, John Kennedy’s motto was "Let’s get the country moving again." It would take another three years, says Fuss, for that to really begin to happen.

What is similar today, he says, is the sudden slowdown in spending by corporate America after several years of aggressive expansion. "Companies are putting off any kind of expansion," he says. "The only borrowing they’re doing is trading in their short-term debt to issue long-term debt. Things are at a standstill and will probably remain that way for the fist nine months of the year."

Still, he doesn’t see the protracted recession reminiscent of his post-Navy days around the corner. "The factors in play now are very different than those of the late 1950s," he says. "The point everyone seems to be missing is the enormous demand created by non-Japan Asia, which represents two-thirds of the world’s population. When you talk about an economic recovery, it’s short-sighted to focus only on what’s going on in North America. The models that worked in 1958 don’t necessarily lend themselves to the picture in 2001."

Fuss believes there are several arguments against a worst-case scenario in which consumers decrease their spending and tip the economy into a recession. "Low inflation gives the Federal Reserve latitude to lower interest rates and pump liquidity into the economy. Banks and the corporate bond market are healthy. And the budget surplus gives the government flexibility to stimulate economic growth."

For the time being, at least, he doesn’t see inflation as much of a concern. "What you really need to watch for are signs that world peace is being threatened on a large scale," he says. "A military buildup in the U.S. could cut into the budget surplus and create an inflationary threat. So far that isn’t happening. But with China and other countries so volatile, the situation bears watching."

He remains optimistic about a late-year pickup. "I think we’ll see the beginning of a moderate recovery later in the year. It won’t be enough to ring any inflationary bells. But next year at this time, we’ll be talking about how bond upgrades are exceeding downgrades."

That would obviously be good news for a fund that depends on credit upgrades for some of its pricing push. The question is whether the sluggish earnings that have impacted the stock market so profoundly will continue to spill over to the bond market as well.

"Earnings jitters are not good for the corporate bond market," says Fuss. "But we believe corporate bonds will post good returns in 2001 because at this point there are two things working in our favor: time and the relative cheapness of these securities."

Reflecting that view, the fund had 35% of its assets in industrial bonds, with another 16% in financial, electric, gas and telephone companies. With an average credit quality of Baa1, the fund’s focus is at the lower end of the investment-grade bond spectrum. Because of concerns about the business environment, Fuss has been able to pick up bonds of unpopular companies such as Lucent Technologies and Columbia/HCA Health on the cheap.

Fuss calls telecom-supplier Williams Communications one of his more "arguable" bond picks. He defends its recent addition to the portfolio because, despite the telecommunications industry’s current woes, demand for cable remains strong. "Williams is a single-B credit with a lot of credit risk attached," he says. "But the company has already made most of the expenditures it needs to lay cable, and the demand for its services is rising."