Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's Beat the Market Week on Morningstar.com, and we had a chance to talk with Dan Fuss, one of the managers of the Gold-rated Loomis Sayles Bond. We're here with Morningstar analyst Sarah Bush to see why she likes the fund so much.
Sarah, thanks for joining me today.
Sarah Bush: I'm glad to be here. Thanks for having me.
Glaser: Loomis Sayles Bond has performed very well over time. What's the secret to the success? What's really driven that outperformance?
Bush: I think what really is at the center of the fund's success is this deep-value, very flexible approach to investing in bonds and related asset classes. So this is a fund that will hold high yield, investment-grade corporates, troubled sovereigns, and it even has sort of moved more into equities and convertibles in the recent years.
This is a type of fund you'd expect to do well in a strong credit environment and in the strong economy. If you look at its five-year returns, you're going to take those with a grain of salt because that's coming right off the bottoms of 2008, and basically any fund that took credit risk did well during that period.
But I think what really stands out is this deep-value and kind of contrarian approach. Dan Fuss was adding to [the fund's credit stake in] Ford in 2009 when people didn't note if the company was going to be going through bankruptcy. He was adding to Ireland, which is a sovereign kind of at the bottom for that type of credit. So I think that that kind of willingness to do the hard work and stick with picks in really difficult environments stands out.
Then obviously, you need a good credit team in order to do this, and Dan Fuss has been at this for a long time and is very, very good at it. They've really built the team behind him, so the two comanagers on this fund have been there for several years and are very strong. They've been at Loomis Sayles for a long time and have been comanagers for a while. And then Loomis Sayles also has a very strong and deep analyst staff backing them.
Glaser: 2013 was a tough year for many fixed-income funds with rates kind of rising somewhat unexpectedly quickly in the middle of the year. But the fund did pretty well. What was behind what happened last year; what kind of decisions brought them to that performance level?
Bush: Right. A couple of things. First of all, credit accurately did pretty well. So if you're looking at high yield, that was an asset class that did really well in 2013. This is the fund in the multisector category, so through cycles it has that corporate exposure. That was definitely a positive for the fund.
Also, you know kind of getting more conservative on interest-rate risk across that portfolio was a positive. And the fund had started to make a move into more convertibles and also into equities, which jumps out if you're thinking about bond funds. So that equity stake, which was kind of in the mid-single-digits last year was really a positive for the fund.
Glaser: If this is a fund that does well, it seems like, when the market is up and when the market is down, when is it tough to own this fund? When would you expect it to lag behind?
Bush: That's a very good question. I mentioned the five-year return looking great. However, if you were holding this fund in 2008, this fund had a really sizable loss, a 20%-plus loss. So this is a type of fund that requires a lot of patience through rough credit markets, through slowdowns in the economy. If you see even a kind of a brief flight to quality like we saw in the third quarter of 2011, it can be difficult for investors to be in this type of fund.
Glaser: Who would this fund be good for? Who would you recommend would hold it?
Bush: What it isn't good for is for diversification, for kind of an equity-heavy portfolio. If you're looking for something that's going to hold in those types of environments, it's not so good. But I do think you could pair it with a higher-quality portfolio, maybe one that had more Treasuries or AAA exposure.
Glaser: If you didn't want that kind of correlation there, what would be some alternatives in the core bond space?
Bush: Looking at the intermediate-term bond fund category is certainly a place where you see those core, better diversifiers. PIMCO Total Return is obviously a strong option in that category. Some higher-quality funds that might be good pairing with Loomis Sayles Bond are Fidelity Investment Grade and JPMorgan Core Bond; they are also options that may be good.
Glaser: Sarah, thanks for sharing your thoughts with us today.
Bush: Thanks for having me.
Glaser: For Morningstar, I'm Jeremy Glaser.