Time to shift to stocks from bonds: Loomis Sayles' Fuss

Legendary bond investor says investors should swap market risk for company risk

Apr 11, 2012 @ 3:28 pm

By Jason Kephart

The looming threat of rising interest rates has legendary bond investor Dan Fuss thinking it's a good time to move away from fixed income and into stocks.

“We're in the foothills of a gradual rise in interest rates,” said Mr. Fuss, vice chairman of Loomis Sayles & Co. LP and manager of the $21.2 billion Loomis Sayles Bond Fund (LSBRX). “Once they start to rise, you're probably looking at a 20- or 30-year secular trend of rising interest rates.”

When interest rates go up, the value of existing bonds drops as new bonds are issued at the higher rates.

The unemployment rate is going to be the main factor in when the Federal Reserve Bank starts to raise interest rates in earnest, Mr. Fuss said.

If the unemployment rate falls to between 6% and 7%, it's likely that the Fed will stop buying up two-year Treasury notes and 30-year Treasury bonds, which has been keeping the interest rate on the 10-year Treasury bill artificially low, Mr. Fuss said.

“Once that happens, you need to get out of the market risk that's in fixed-income and into the company-specific risk you can find in stocks,” he said.

Investors have shown no sign of losing their insatiable appetite for bonds and their disdain for equities over the past 12 months. Taxable-fixed-income funds have had more than $150 billion in net inflows, while U.S and international stock funds have experienced net outflows of more than $118 billion, according to Morningstar Inc.

Since the financial crisis, total assets in taxable-fixed-income funds have more than doubled to $2.1 trillion, up from $1 trillion at the start of 2008.

Mr. Fuss has managed the Loomis Sayles Bond Fund since its inception in 1991. Under his watch, the fund has had annualized returns of 8.74% for the past 15 years, which puts the fund in the top 5th percentile of all multisector-bond funds over that time period.

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