Daniel J. Fuss, chairman of the Global Investment Committee of Boston’s Loomis, Sayles & Company is a value-oriented, eclectic investor who is not afraid to plunge into foreign currencies and junk debt. His $1.6 billion Loomis Sayles Bond Fund (LSBDX) has racked up a 10.07% average annual total return over the past 10 years–and, for 2003, 14.9% through May 9. Fuss also manages the $149 million Managers Bond Fund (MGFIX), which is oriented more toward higher-quality domestic plays. It is up 6.95% so far in 2003, and has posted an 8.44% average annual return over the past 10 years. Fuss chatted with IA Editorial Director William Glasgall in May.
In both funds, you’re heavily invested in Fannie Mae debt. It’s the currency. In both funds, we have non-U.S. dollar Fannie Mae paper, primarily New Zealand and Australian dollar. We’re also buying intermediate Canadian debt.
You’re pessimistic about the U.S. dollar? We’ve got two big negatives for the dollar: A large and growing current account deficit, which is driven by the trade deficit, and the investment component of the current account deficit, which is getting increasingly negative. We also have the budget deficit. In Canada, the combined [federal and provincial] current account is positive. Their economy looks a little stronger than ours. I worry a lot about Europe. But we have a lot of euros because of the yield differential [with the U.S.] even though it is going away in a huge hurry. The corporate [investing] opportunities have lessened. On the government side, you still have a reasonable yield advantage. Buyers of quality are going to go to Europe. And you also have this mismatch of yield curves going on in New Zealand, Canada, and Australia.
Will U.S. interest rates spike higher once the economy perks up? Rates will move sideways to up, but not for a while. The Fed is sitting on short-term rates, but might force them down again. They will move sideways to up over the next few years. But I don’t see long rates backing up more than 40 or 50 basis points.
Nevertheless, you’ve shortened your average maturity and duration. From 1991 to about a year ago, Loomis Bond used to be 80% 10-year bonds, with a duration pushing 10. Now we have 40% [of our assets] riding the yield curve from two to six years.
What about municipal debt? The credit quality direction is very negative for many municipal issuers. We went through a boom, they benefited big time, and then tax collections collapsed. These are not happy days. State and some local rates will start to escalate when they want to raise new money. The opportunity [to invest] is not here yet, but it is coming.
What’s your outlook for U.S. stocks? My guess is that the volume bottom was last July and the price bottom was in October. But we’re in a trading range analogous to the late 1970s. After the fourth of July last year we sold a lot of bonds to buy stocks for rebalancing [in diversified portfolios I also manage]. We also did that last October and, to a lesser degree, in the first quarter. Since last October, stocks have moved up enough to eliminate the urgent need to rebalance. But among defined benefit plans, the amount of funds moving into equities is really escalating. IBM, Johnson & Johnson–they’re all going toward stocks to get the asset allocation back in line.