Thursday, June 18, 2009
Fuss Won’t Touch U.S. Debt for Loomis Fund as Deficit Mounts
June 18 (Bloomberg)By Charles Stein --- Daniel Fuss, the Loomis Sayles bond fund manager who has matched Bill Gross’s returns for the past decade, isn’t tempted by U.S. Treasuries even after yields on the 10-year note have climbed more than 64 percent this year.
“The U.S. government keeps making bonds available to us at increasing rates of interest,” Fuss, 75, said in an interview in his Boston office. “Their funding requirements are horrific.”
Yields on the 10-year note rose to 3.63 percent from 2.21 percent at the beginning of the year as the government borrows to finance a deficit that may quadruple to more than $1.85 trillion by Sept. 30, according to the nonpartisan Congressional Budget Office. Investors are demanding higher yields to offset the effect of a possible increase in the inflation rate and a falling dollar on the value of the debt.
Fuss, who helps manage $50 billion in bonds, said the government’s spending and an improving economy could push the yield on the 10-year note to as much as 6.25 percent in the next four to five years. Bond yields rise as prices fall.
The $15.5 billion Loomis Sayles Bond Fund, which Fuss co- manages, returned 6.91 percent annually for the 10 years ended in May, according to Morningstar Inc., the Chicago-based research firm. Gross’s $157 billion Pimco Total Return Fund, the largest mutual fund, returned 6.92 percent a year.
Gross, the co-chief investment officer of Pacific Investment Management Co., had 66 percent of his assets in bonds rated AAA by Standard & Poor’s at the end of May, according to the Web site of the Newport Beach, California-based firm. Four percent of assets were in bonds rated below investment grade, the site said.
Fuss had 19 percent of his money in AAA bonds and 27 percent in bonds below investment grade, according to Morningstar.
“This is not the kind of fund you want for the safe part of our portfolio,” said Miriam Sjoblom, an analyst at Morningstar, in a telephone interview. She described Fuss’s fund as “one of the most volatile.”
The Loomis Sayles Bond Fund lost 22 percent last year, dragged down by its holdings of high-yield debt and foreign bonds, according to a regulatory filing. The fund gained 17 percent this year through June 16, Bloomberg data show. Investors put $1.61 billion into the fund through May, according to Morningstar.
Fuss, who has a master’s in business administration from Marquette University in Milwaukee, has worked in the investment business since 1958, the last 33 years for Loomis Sayles. He constructs charts and tables on bonds, commodities and currencies on graph paper using colored pencils. Fuss said he spends two hours every weekend doing the work by hand.
Washington’s ongoing need to borrow will pressure interest rates to rise, Fuss said.
“The tide of borrowing will not retreat,” he said. “It is going to keep coming at you.”
The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered more than $1.47 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg. The government has responded with increased spending, lowered interest rates and corporate bailouts.
The government may borrow an unprecedented $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion of 2008, according to Goldman Sachs Group Inc. Federal Reserve Chairman Ben Bernanke told Congress earlier this month that deficit concerns are already influencing the prices of long-term Treasuries.
“Unfortunately, the trend for Treasuries is higher over the next few years,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.
The Loomis Sayles Bond Fund had no holdings of U.S. government securities at the end of April, according to Morningstar.
The fund had 63 percent of its holdings in U.S. corporate bonds, with the biggest concentration, 31 percent, in bonds rated BBB, the second-lowest investment grade at Standard & Poor’s, the New York-based rating company. U.S. corporate bonds rated BBB returned 15.6 percent this year through June 16, according to the Merrill Lynch & Co. U.S. Corporate BBB Index.
Fuss said the rally in BBB bonds “has quite a bit to go.” He said gains in bonds of higher quality would be more muted. He called parts of the high-yield market “downright scary” because some companies borrowed too much money as the economy grew. The fund has about two-thirds of the level of high-yield bonds it typically holds, Fuss said.
The Loomis Sayles Bond Fund can have as much as 20 percent of its assets in bonds from outside the U.S. and Canada. Fuss said the fund is currently “bumping up against the limit” of global holdings.
Fuss said his international investments are influenced by his view of China’s expanding role in the world economy.
“Rising demand from China and Asia will be a huge surprise going forward,” he said in the interview.
Countries such as Thailand, Malaysia, Indonesia, Australia and New Zealand would benefit from China’s rise, he said. As a holder of government and corporate bonds denominated in those currencies, he said he expects to profit as the currencies appreciate against the dollar.
The Australian dollar has climbed 27 percent against the dollar since hitting a low for the year March 2, Bloomberg data show. The New Zealand dollar has gained 29 percent.
Fuss said bonds from the two countries are especially attractive because their governments set aside money to pay for retirement obligations to residents.