In a Bloomberg interview this week, Kathleen Gaffney (co-manager with Dan Fuss) reported that Loomis Sayles & Co. fled U.S. Treasuries and bought Canadian and Indonesian debt, beating out 95% of fixed-income funds thus far in 2010. The $19.5 billion Loomis Bond Fund has returned 12.20% as the Boston-based firm shifted money into Canadian government securities, emerging markets and convertible and junk bonds, according to data compiled by Bloomberg. PIMCO’s Total Return Fund, the world’s largest bond mutual fund, gained 7.99%.
To view the Bloomberg interview follow this link.
Dan Fuss (MU alumnus) is a 'Friend of the AIM Program' and a featured panelist at the AIM Forum on January 25, 2011.
During the interview, Gaffney indicated that Loomis Sayles has not owned Treasuries for more than a year and has been betting that emerging-market currencies, including Indonesia’s rupiah, would appreciate against the U.S. Dollar. The Federal Reserve affirmed on Dec. 14 its plan to buy as much as $600 billion of Treasuries to stimulate the economy in the latest stage of a process known as quantitative easing, or QE2. That is something that could further weaken the U.S. currency, Gaffney said.
|Fuss and Gaffney|
“We’re going to see the developing world lead the global recovery,” said Gaffney, who has worked at Loomis for 26 years and along with Dan Fuss helps oversee the firm’s $150 billion in assets. “The developed world is getting on that QE2 bandwagon, letting your currency devalue.” The Loomis Bond Fund holds Indonesian 10% government bonds denominated in rupiah due in September 2024, Bloomberg data show. The government’s rupiah debt has returned an average of 25% in dollar terms this year, according to JPMorgan index data.
U.S. Treasuries have lost 2.09% in December thus far, the worst monthly performance in a year, according to the Bank of America Merrill Lynch index. The U.S. government has issued $2.15 trillion of notes and bonds in 2010, topping last year’s record of $2.109 trillion. “There’s going to be a ton of supply,” said Elaine Stokes, who also helps manage the Loomis Bond Fund along with Dan Fuss and Matthew Eagan. “Whenever there’s an artificial buyer in the market, we have to be a little bit worried.”
Loomis Sayles has shortened the average duration of its flagship bond fund to about 5.9 years from 6.5 years at the end of 2008 to guard against rising interest rates, Gaffney said.The benchmark Treasury yields 3.34% and is forecast to yield 3.55% by the fourth-quarter of 2011, according to the median estimate of economists surveyed by Bloomberg.
Fuss and Gaffney favor Canadian government bonds instead of Treasuries in part because the country has less debt relative to the size of its economy than the U.S. Canada’s budget deficit for fiscal year 2010 equaled 3.6% of its GDP, compared with an estimated 8.9% for the U.S. Canada is also better positioned to benefit from emerging market demand for commodities, Gaffney said. Commodities account for about half of Canada’s export revenue.
“Our developed world positions, and the commodity currencies, Canada, Australia, New Zealand, are also beneficiaries of emerging market demand,” Gaffney said. “We have pared down the investment-grade corporates,” she added. “That’s the area where we’ve seen the biggest tightening in spreads, leaving them much more sensitive to interest rate changes.”While Loomis has sought junk bonds that offer a cushion from rising interest rates, the firm is wary of taking too much credit risk, Gaffney said.
Dr. Krause said, "Dan Fuss and his colleagues are famous for their exploits running international and domestic bond funds. They are again delivering top tier returns; however, Morningstar is not considering them for the Fixed Income Manager of the Year award. This is unfortunate because the Loomis Sayles team is again producing amazingly strong results for the year. When the final numbers are in - it would not surprise me that Dan Fuss and Kathleen Gaffney have some of the best overall fixed income results in the industry."