Quick Take:The $539-million Loomis Sayles Global Bond Fund/Retail (LSGLX) has wide latitude in its investment mandate: It can invest in any fixed income security issued by either government agencies or corporations in any country, as long as it is attractively valued and located in a market with an improving credit and interest rate environment.
For the year ended May 31, the fund gained 4.7%, versus 3.1% for the average global bond fund. For the three-year period, the fund rose an average annualized 15.7%, versus a 9.9% gain for the peer group. Smart moves into foreign currencies such as the Norwegian krona and New Zealand dollar have helped the fund outperform.
The portfolio has demonstrated slightly more volatility than its peer group, with annual annual turnover at about half of the peer group average. The fund boasts an expense ratio of 1.15%, significantly below the peer group’s 1.37% average.
Kenneth Buntrock and David Rolley took over management of the Fund in September 2000, on the retirement of former manager John De Beer. Buntrock and Rolley also co-manage Managers Global Bond Fund (MGGBX). In addition, Rolley co-manages Loomis Sayles Worldwide Instl Fund (LSWWX). Both contributed to the interview.
The Full Interview:
S&P: What kind of securities do you invest in?
LOOMIS: We look for attractively valued fixed-income securities anywhere around the globe. Typically, the issuer has an improving credit profile. We think that the most value can be gained from securities whose credit risk has been inefficiently priced by the markets.
S&P: How do you construct the portfolio?
LOOMIS: We combine a top-down macroeconomic approach with a bottom-up bond-picking process. We regularly meet with our fixed-income analysts to formulate a bond policy to get a clear picture of the state of domestic and global bond markets by analyzing such factors as yield curves, interest rates, credit profiles, and currency. We also look at the stability and/or volatility of regional bond markets. This provides us with a blueprint. Then we work with our asset-class team to determine sector preferences.
Essentially, we seek to construct a portfolio with many moving parts, reflecting our assertion that different segments of the fixed income universe will underperform or outperform due to the vagaries of the various business cycles around the globe. We aim to outperform our benchmark and peers during down markets. Although we use a large team of analysts and researchers, we have the final say in all buy and sell decisions.
S&P: Describe the current portfolio.
LOOMIS: As of March 31, the fund comprised 179 positions, although the top ten positions accounted for nearly 30% of total assets. Our top holdings tend to represent our long-term, core positions: high-quality, highly-liquid, triple-A rated securities.
We like to keep a large number of holdings. We use diversification as a risk-control measure and we don’t make big bets on private sector credit issuers. Typically, the fund is spread across 30 countries, 40 industries and about 10 different currencies. This diversification allows us to be free of any single business cycle story.
S&P: To what do you attribute the fund’s recent outperformance?
LOOMIS: The fund rose 20.4% in 2002 and another 29.3% in 2003 [versus gains of 11.4% and 17.3%, respectively, by the peer group]. In 2002, when the dollar fell, we had big positions in some of the smaller investible currencies like the Norwegian krona and New Zealand dollar, which did extremely well that year, with gains of 30% to 40%. That was the year when credit really took a hit with the Enron and WorldCom crises, leading to a panic out of corporate bonds.
The stock market bottomed out in October of that year. At the time, high-yield spreads were 1200 points over U.S. Treasuries. In the fourth quarter of 2002, we increased our exposure to investment-grade corporate bonds, high-yield corporates, foreign currencies and the emerging markets. All these asset classes performed well in 2003.
After posting outsized returns in 2002 and 2003, we believed the bond rally would begin to lose steam and the Federal Reserve would begin to tighten and spreads would widen again. As a result, we brought our currency exposure closer to neutrality, relative to our benchmark.
S&P: What benchmark do you use?
LOOMIS: Up until a few years ago we used the Citigroup World Government Bond Index. However, government bonds only represent about one third of the foreign fixed-income universe, so we converted to the Lehman Brothers Global Aggregate Index, which is a much better reflection of the global bond markets. For example, the Lehman Index has about 17% exposure to corporate bonds.
S&P: What is the fund’s current credit profile?
LOOMIS: As of March 31, we had nearly half, 46.8% of total assets, invested in securities rated AAA. The other largest exposures were government agency, 17.8%; AA-rated securities, 10.8%; BAA, 8.6%; and BA, 7.7%.