Bond Funds: Behind Dan Fuss' Stellar Record

The manager of the top-performing Loomis Sayles Bond Fund has learned over the last year to keep the portfolio as liquid as possible

By Lauren Young

It takes an iron-clad constitution to navigate the fixed-income markets these days. No wonder Dan Fuss, manager of the $18.5 billion Loomis Sayles Bond Fund (LSBRX), orders a plate of spinach for lunch on a mid-October afternoon.

Among fixed-income investors, Fuss has shown Popeye-like strength over the years. He doesn't have the name recognition enjoyed by Pimco chief Bill Gross, manager of the massive Pimco Total Return Fund, now the nation's largest mutual fund with $186 billion in assets. But Fuss, 76, has a leg up on his competitors—after all, he's been managing money for five decades.

Discussing the events of the financial crisis during a meal at a restaurant literally in the shadow of Lehman Brothers' former headquarters, Fuss says: "It wasn't pleasant to go through." Indeed, the Loomis Sayles Bond Fund lost 22.1% in 2008. Fuss likens investing in the bond market's choppy waters to the day he crossed the Atlantic in a Nor'easter, when he was a Naval midshipman. "I made a mental note to myself: 'Avoid Nor'easters,'" Fuss says.

For Fuss, the biggest lesson from the past year is to keep the portfolio, which he co-manages with Kathleen Gaffney, as liquid as possible. The bonds he worried most about when the credit crisis hit were offerings from sovereign issuers, such as Mexico, Canada, and New South Wales. What surprised Fuss the most is that those and other foreign governments supported their bond markets to avoid a credit crunch. What Fuss did not anticipate is that giant corporations such as Johnson & Johnson (JNJ) and Procter & Gamble (PG) would see their access to capital freeze up.

Avoiding Treasuries

Today, the Loomis Sayles Bond Fund has about 12% invested in Canadian government bonds and 3% in Mexican debt. Yet its exposure to U.S. Treasuries, arguably the most liquid debt instrument in the world, is nil. That's because yields for U.S. Treasuries hover around the lowest levels in decades. And the one thing bond investors expect from the Loomis Sayles Bond Fund is yield—the portfolio is currently yielding about 6%. To generate that yield, one-quarter of the portfolio is invested in speculative-grade debt, although Fuss is reluctant to talk about specific bond credits.

Fuss also likes corporate bonds—some of the fund's top 10 holdings include issues from Intel Corp. (INTC), Medco Health Solutions (MHS), and International Paper (IP). Overall, corporate balance sheets look pretty good because corporations rushed to borrow debt when the window opened to capitalize on short-term interest rates, he says. Fuss muses that about half of the companies that came to market did so just because they could—which means they have extra cash on hand to grow their businesses or invest in technology upgrades. The big challenge—and one that is a huge hurdle for the health of the U.S. economy—is to coax them to do so.

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