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Fuss: Taking a Cautious Approach on Europe

Eric Jacobson

Eric Jacobson: Hi, I'm Eric Jacobson, director of fixed-income research for Morningstar's fund analysis group.

I'm here today at the Morningstar Investment Conference with Dan Fuss of Loomis Sayles. Dan is also the manager of the Loomis Sayles Bond Fund and vice chairman of the firm.

Dan, thank you so much for joining us.

Dan Fuss: Thanks, Eric. Good to be here.

Jacobson: So, Dan, right now we're on the tail end of more news about Europe and how things have either flared up or settled down, depending on the minute that we're looking at. Can you give us a feel for what your concerns are at this point, and what your expectations are going forward?

Fuss: Well, I don't know what's going to happen, Eric. I don't feel comfortable with it. I think the social part of this is truly tragic. It's certainly gone further on the downside than I had thought it would go. The fear element that I was so afraid of a little over a year ago is actually coming true, and that is that it looks like Greece might be leaving the currency. I don't know how they're going to handle that. If that happens, possibly the European Union now will say, well that has a certain merit to it, but it has a high risk profile politically, quite frankly, when it comes to armies and navies and that kind of stuff in the Eastern Mediterranean. That's a far greater risk than market volatility, for example.

So, I am worried about it, and I don't think I have anything unique to offer. I did notice today, just a couple hours ago, the European Central Bank said they were lowering collateral requirements. In other words, they're going to be more liberal in their lending to governments. It's not good. I don't like it, and the impact on the markets is obviously negative.

Jacobson: Well that was my other question: You are known for managing money in sort of--I don't want to overdo it--but eclectically, let's just say. Compared with some more run-of-the-mill core managers, you've got assets all over the world typically. How are you positioning your portfolios, if at all, to react to what you're seeing going on in Europe today?

Fuss: Well, cautiously. Relative to say a global weighting in the euro, we're very, very light, but we don't have to be in the euro to begin with. So, I think we've got roughly 3% currency exposure to the euro. But it's there because we really like the specifics of something where the debt happens to be denominated in the euro. And ... anytime you are denominated in the euro, the chances are you have some activity, in that way. Our big position is actually Irish government bonds, and that's worked out wonderfully well as far as the bonds--the currency has gone down a bit--but more than compensating for that is the price of the bonds.

When it comes to corporates, where the other smaller holdings are, individually it seems like they are under a worst-case scenario, a survivor, and will pay their bills and are reasonable credits, and they're necessary. They're not something that could be dropped by the wayside. So, on that basis, we're there.

But the overall setting is negative, it's negative for the world economy, and it's potentially quite negative geopolitically--and that's a far cry from the ups and downs of markets.