Dan Fuss

Loomis Sayles Bond Fund

by Marla Brill
MFI Publisher

Bottoms-up stock pickers like to say they don’t pay much attention to economic news. They buy stocks because they like a company, the stock is cheap, earnings are growing rapidly, or for any number of other reasons that don’t relate to the economic environment.

By contrast, if you ask a bond fund manager about the economy, you’re likely to get an earful. Bonds, for all their different yields, issuers, credit ratings and other variations, are at their core interest-bearing securities whose fortunes are inextricably tied to the ebb and flow of the economy. Not surprisingly, Dan Fuss, vice chairman of Loomis Sayles & Co. and manager of the $1.7 billion Loomis Sayles Bond Fund, has his share of thoughts about where the economy has been, and where it may be headed.

While economic prognostication isn’t hard to come by these days, Fuss’ opinions get more play than most. At age 67, he is something of an elder statesman in the world of bond fund management. With near-instant encyclopedic recall, he can tell you what the bond market has been up to since before John F. Kennedy took office, and how it relates to what’s going on today.

Beyond historic knowledge and some good yarns about his hometown of Milwaukee is the solid long-term performance of the fund Fuss has managed since its inception in 1991. From that year through the first quarter of 2001, the Loomis Sayles Bond Fund has returned an average of 10.76% annually, compared with 8.19% for the average triple B-rated corporate bond fund, according to Lipper. That makes it first in its category over that time frame.

But the fund hasn’t kept pace over the last year. With a one-year total return of just 0.54%, it ranked 149th out of 153 funds in its Lipper category for the year ending March 31, a time when the average fund in the category returned 9.64 %. While Loomis Sayles Bond Fund is one of the more volatile offerings in its category, it is also one of the highest yielding, sporting a recent 30-day SEC yield of 8.58%.

Fuss may be a mild-mannered Midwesterner, but among rival fixed-income managers he is known for his guts. Chalk up at least some of the fund’s recent under-performance—as well as its solid long-term track record—to Fuss’ trademark style of rooting for the underdogs of the bond world. By buying bonds on the cheap when few investors want them, he looks to lock in a high current yield, as well as upside potential when a company’s credit rating improves.

The aggressive fixed-income strategy works best in a strengthening economy. But with the economic slowdown, many of Fuss’s beaten-down bonds have just gotten cheaper, instead of turning around.

A high exposure to foreign bonds also has hurt the fund. With 28% of its assets in foreign bonds, many of them high-quality Canadian government issues, the continued strength of the U.S. dollar against foreign currencies has taken its toll on performance. "We have very distinct performance cycles," admits Fuss. "But the things that have hurt us will eventually swing around to help us."

Next: A late-year recovery?