Fuss beats bond competition - including Gross - by thinking like a stock picker

Dan Fuss left rival bond-fund managers (including Bill Gross) behind by using a style generally associated with bargain-hunting stockpickers.

Sep 27, 2013 @ 9:18 am

Loomis Sayles & Co.'s Dan Fuss left rival bond-fund managers including Bill Gross behind in his eighth decade, by using a style generally associated with bargain-hunting stockpickers.

Fuss, who turns 80 tomorrow, managed the two best large U.S. bond funds over the past 10 years. His $15.1 billion Natixis Loomis Sayles Strategic Income Fund and the $21.7 billion Loomis Sayles Bond Fund both returned more than 125% over the period, ranking first and second among 65 bond funds with more than $5 billion in assets that have been in existence for at least 10 years, according to data compiled by Bloomberg. The flagship Loomis Sayles Bond Fund, started in 1991, was also the top fixed-income fund over the past 20 years.

Fuss won with skills used by value-oriented stock investors, finding bargains such as beaten-down U.S. bank bonds in 2008 and Irish government debt in 2010 and profiting as the securities recovered along with the global economy. Fuss analyzes individual issuers and scouts for cheap securities among sovereign, investment-grade and high-yield bonds. He also invests in foreign currencies and stocks.

“A lot of bond guys are absorbed with spreads and nuances of the yield curve,” said Kenneth Heebner, a Boston-based stock picker who has known Fuss since the 1970s. “Dan approaches things the way a stock investor would. He is looking for opportunity,” said Heebner, whose $1.5 billion CGM Focus Fund has beaten 99% of rivals over the past year.

The eclectic blend of Fuss's picks is a legacy of his early days in the investment business, when his job was to analyze companies and buy their whole range of securities for several Midwestern banks, including First Wisconsin Bank in Milwaukee.

“Back then there was no such thing as an index to compare yourself to,” Fuss, whose career began in 1958 at Wauwatosa State Bank in Wauwatosa, Wis., said in an interview in his Boston office. “The idea was to make money by finding the cheapest things out there.”

Bloomberg's ranking looked at fixed-income funds that invest in a wide range of securities, although excluded those that invest exclusively in high-yield bonds. Some fixed-income funds are allowed to invest in stocks and bonds that can be converted into equity stakes.

The funds' holdings of stocks, convertibles and high-yield bonds helped Fuss beat more than 96% of rivals this year. His view that U.S. interest rates are heading higher, an opinion he has held for several years, insulated him from the slump in Treasuries that hurt most bond investors over the past few months.

Beating Gross

Pacific Investment Management Co.'s Gross, who manages the world's biggest bond fund, has seen his flagship Pimco Total Return Fund decline 2.1% this year through Sept. 24, compared with a 3.6% increase at Fuss's Loomis Sayles Bond Fund. Pimco Total Return is a more traditional bond fund than Fuss's, and achieves lower volatility by investing mainly in government bonds, mortgages and investment-grade debt.

Over the past 10 years, Fuss's Loomis Sayles Bond Fund has advanced at at an average annual rate of 8.6%, compared with 6.2% for Gross's flagship fund.

Over the past 20 years through Aug. 31, Fuss's fund climbed at an annual pace of 9.1%, compared with Gross's 6.8%, according to Chicago-based research firm Morningstar Inc. The Loomis Sayles Bond Fund even beat the Standard & Poor's 500 Index of U.S. stocks, which rose 8.6% in that period.

The Loomis Sayles Bond Fund, the Natixis fund and a third fund run by Fuss, the $1.2 billion Loomis Sayles Fixed Income Fund, were the top performing multisector bond funds over the past decade, according to Morningstar.

Fuss's strong historical results have come with stumbles along the way. The Loomis Sayles Bond Fund lost 22% in 2008, worse than 96% of peers, and 4.9% in the third quarter of 2011, when investors deserted riskier investments over concerns about the European debt crisis. The fund had higher volatility than all but three of the 65 large funds over the past decade, according to data compiled by Bloomberg.

“With Dan you get a lumpier ride, but over the long haul that volatility has paid off handsomely,” Jeff Tjornehoj, an analyst with Denver-based Lipper, said in a telephone interview.

The volatility might explain why Fuss's funds have lagged behind rivals in attracting assets. Investors pulled money from Loomis Sayles Bond and Natixis Strategic Income in the three years ended Dec. 31, data from Morningstar show. Gross's $251 billion Pimco Total Return Bond Fund won more than $35 billion in deposits over the same period, even as he failed to match Fuss' returns.

No Advertising

Elaine Stokes, who, along with Matthew Eagan, serves as co- manager on all of Fuss' funds, said because the funds don't fit neatly into any box, they don't always make the lists of recommended investments.

“We spend zero dollars advertising the funds and are quite happy to have them grow at a steady pace,” she wrote in an e- mail.

Fuss, who has been at Loomis Sayles since 1976, works in a corner office with a view of Boston Harbor. His walls are decorated with pictures of navy vessels, including two that depict aircraft carriers. Fuss served as a signal officer on the carrier USS Saratoga during his stint with the U.S. Navy from 1955 to 1958. His conversation is peppered with analogies to aircraft carriers and how navigating the bond market is similar to landing planes on a flight deck.

Fuss runs the morning meeting of Loomis Sayles' fixed- income department, which is attended by about 100 people. He maintains a busy speaking and travel schedule. In December, he will make his second trip to Asia this year. In 2000, Fuss was inducted into the Fixed Income Analysts Society's Hall of Fame.

“I enjoy what I do,” he said. “It gives me enormous energy.”

Fuss' experience did not prepare him for September 2008, when the failure of Lehman Brothers Holdings Inc. triggered a freeze-up of financial markets. Loomis Sayles Bond fell 18% in the month following Lehman's Sept. 15 collapse.

“Did I see it coming? No,” said Fuss. “But once it happened did I understand where we were? Yes.”

Fuss started buying beaten-down bonds in October and November of 2008. Heebner recalls meeting Fuss in early 2009 and comparing notes on New York-based Morgan Stanley, whose bonds were yielding 10% at the time.

“We both agreed that if the company didn't go broke, Morgan Stanley was a helluva buy,” said Heebner.

The yield on Morgan Stanley's 4.75% subordinated security that matures April 2014 topped 10% in March 2009, according to data compiled by Bloomberg. The security, a holding of Loomis Sayles Bond Fund, gained 29% between March 31 and Dec. 31 of 2009, according data compiled by Bloomberg.

“It was an improving credit and the best value,” Fuss said of the Morgan Stanley investment.

Fuss's Loomis Sayles Bond Fund bought Irish government bonds in the third quarter of 2010, regulatory filings show. Loomis was impressed by Ireland's willingness to make quick financial sacrifices to resolve its debt problems, Brian Kennedy, a portfolio manager who works with Fuss, wrote in an e- mail.

Irish Bonds

Irish bonds fell 10% in the fourth quarter of 2010, according to the Bank of America Merrill Lynch Ireland Government Index. They gained 13% in 2011, 29% in 2012 and 5.6% in the first six months of 2013, as global investors gained confidence Ireland could meet its obligations. Kennedy said the gain on some bonds has been about 50%.

Fuss spotted value in stocks, rather than bonds, in September 2011, just before equities reached their low point for the year. The Strategic Income Fund, which can hold up to 35% of its assets in stocks, roughly doubled its common stock holdings to 14.3% in the third quarter of 2011, according to regulatory filings. Fuss said most of the buying was done in a short period in early September of that year.

Eagan, part of the 14-member team that helps Fuss manage $86 billion, said the move reflected highly unusual market conditions in which dividend yields on stocks were higher than the yields on corporate bonds.

In October, Kathleen Gaffney, the best-known member of the group apart from Fuss, left Loomis after almost three decades to become co-director of investment-grade fixed income at Boston- based money manager Eaton Vance Corp.

“Losing Kathleen wasn't a good thing, but there is a deep bench supporting Dan Fuss,” Sarah Bush, an analyst at Morningstar, said in a telephone interview.

Fuss has been avoiding Treasuries since at least 2010, arguing that yields were too low and that interest rates would eventually move higher.

“They are the riskiest place to be if you're concerned with, in our mind, the longer-term trend,” he said about Treasuries in May 2010.

Fuss last week said 10-year Treasury yields, now at about 2.6%, could reach 4.25% in the current cycle, without specifying when that would happen.

Rising Rates

“Our view continues to be that interest rates will continue to advance higher on a secular basis and we must position the portfolio accordingly for our investors,” Eagan wrote in an e-mail.

Fuss has some history with rising rates. In the first few decades of his career, from 1958 to 1981, interest rates generally moved higher, he said.

“What works in that kind of environment?” he asked, before answering his own question. “Individual bond picking and diversification.”

Long careers are the norm in the Fuss family. His father worked until he was 87. His grandfather worked in a Wisconsin tavern until the age of 95. Fuss told the Boston Globe last year that he planned to work at least another 30 years.

Fuss put it this way last week: “I have no plans to ride off into the sunset.”

(Bloomberg News)


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