Since its inception in 1991, Loomis Sayles Bond (
) has been far friskier than the typical bond fund, often fishing
for value in risky sectors that other fixed-income funds wouldn't
Not now. Founding manager Dan Fuss and co-managers Matt Eagan
and Elaine Stokes have put 27% of the fund's $25 billion fund in
assets into short-term U.S. and Canadian government issues. Fuss
says that's the highest weighting the fund has ever held in such
The reasoning behind the move is simple, Eagan says: It's
increasingly difficult to find undervalued assets in any corner of
the bond market. "Valuations across the spectrum are unattractive,"
What's more, the market hasn't, in the managers' view,
adequately priced in the geopolitical crises that have erupted
across the globe, including those in the Middle East, Ukraine and
the South China Sea, where tensions have flared over recent oil
drilling by China in disputed waters.
On top of that, the Federal Reserve will soon end its massive
bond-buying program and appears on the road to raising short-term
interest rates next year. Eagan and his colleagues believe the
long-term bull market in bonds, which began in 1982, is over, and
that Fed action, combined with an improving economy, will push
rates higher. Upcoming economic numbers will show "more robust
growth," Eagan predicts. Higher rates will mean lower bond
Fuss has traditionally loaded the fund with high-yield corporate
bonds, but Eagan says that junk is now one of the riskiest places
in the bond market.
Indeed, junk bonds have already hit an air pocket. Since July 7,
the yield on the Bank of America/Merrill Lynch US High-Yield Master
II index has spiked from 5.3%, among the lowest levels in history,
to 6.0% on Aug. 1, and the index price lost 2%. And Eagan thinks
the decline has further to go. (All returns and yields are through
Loomis Sayles Bond's long-term record is superb. Over the past
ten years the fund returned an annualized 8.3%--nearly double the
return of the Barclays U.S. Aggregate Bond index.
But those returns have come with some big bumps in the road. In
2008, most notably, the fund plunged 22.1%, while the Barclays
index, which is heavy on government-backed bonds, gained 5.2%. In
short, when it comes to returns and risk, Loomis Sayles Bond has
performed more like a stock fund than a fixed-income product.
That's because the fund has tended to hold large stakes in junk
bonds and emerging markets, two categories that tend to mirror the
performance of stocks.
Some bond funds currently see value in emerging markets. Not
Loomis Sayles. As the Fed withdraws its stimulus, the managers
believe developing-markets bonds will suffer. The fund has just 3%
or so in emerging markets.
The managers aren't anticipating a 2008-style catastrophe.
Instead, Eagan says, the fund plans to buy back into the riskier
parts of the bond market after they fall far enough in value to
look attractive. "We're not worried about junk-bond defaults
spiking," he says. "We're more concerned about illiquidity in the
What does the fund own? As of July 31, it had 15% in
investment-grade corporates, 31% in foreign bonds (mostly Canadian
governments), 18% in junk, 16% in Treasuries, 8% in convertible
securities and 6% in preferred and common stock. The average credit
quality of the fund is triple-B, a bit higher than usual. The fund
yields a historically puny 2.4%.
Despite all those short-term bonds Loomis Sayles owns, the fund
will suffer some if rates rise. Should they climb one percentage
point, the fund's price would fall by about 4%.
Whether you own the fund or not, you'd be foolish not to pay
attention to the fund's dramatic portfolio shift--given Fuss's long
and superior record, as well as his customary aggressiveness.
Eagan adds a note of warning for stock investors. Junk bonds, he
says, typically are "the canary in the coal mine" for the stock
market. What's more, he notes, stocks of small companies have
already begun to sell off.
Steven T. Goldberg
is an investment adviser in the Washington, D.C. area.