Dan Fuss’ Loomis Sayles Bond Fund underperfoms, hit by dollar’s rise

Loomis Sayles & Co.’s Dan Fuss and his team of bond-pickers are on track to deliver worse performance this year, relative to their competitors, than during the financial crisis following a soured bet on foreign debt.
Their $22.6 billion Loomis Sayles Bond Fund (LSBDX), has returned -2.73% this year as of Thursday. That’s in a year when his competitors have easily topped the benchmark Barclays Aggregate U.S. Bond Index, delivering positive returns at times when the index did not. Ninety-six percent of funds ranked in the same category by Morningstar Inc. beat Mr. Fuss’ team.
Mr. Fuss attributes the negative returns to foreign currencies. His fund has taken on nearly twice the non-U.S. government debt as its peers, with billions priced in Canadian dollars and Mexican pesos. Both currencies have slid.
But from financial advisers to analysts who cover the firm, admirers of the firm’s risk-courting approach are taking a spiritual approach to the losses: This too shall pass. The withdrawals have been muted: Although a total of about $1.2 billion has come out of the Loomis Sayles Bond Fund and the similarly underperforming Strategic Income Fund (NEZYX), they still have net inflows over the past 12 months.
HARD TO PICK CURRENCIES
“It’s hard to consistently pick which currencies are going to do well,” said Matt Cody, chair of the asset allocation committee at Wetherby Asset Management, whose firm sold its Loomis fund stakes in 2010 but would consider using them again in certain market cycles. “When spreads go out wide, they’re the ones that we want to go with because they have a knack of squeezing out all the available performance.”
The greenback has strengthened in response to stable U.S. growth, while global market volatility in Europe, China and elsewhere has increased the value of dollar-denominated U.S. Treasury debt, analysts said. The Euro has fallen in response to easy monetary policies by the European Central Bank, while low oil prices may have hurt exporters, such as Mexico and Canada. One U.S. dollar now buys $1.27 Canadian, up from $1.16 at the beginning of the year. $1 U.S. buys 15.72 pesos, up from 14.74 over the same period.
If it hadn’t been for the dollar’s rise, Mr. Fuss said, the funds’ return would have been positive, too — approaching 0.7% for the year. Similar bets have cost the $18.7 billion Strategic Income Fund 298 basis points in total return this year through Thursday, he said.
And as Loomis has worked to meet the redemptions it has had, the stakes held in easy-to-liquidate, short-term Treasuries, which are low-yielding, “haven’t helped,” either, Mr. Fuss said.
‘GOOD MOVE FOR YIELD’
“It was a good move for yield. It was a good move for relative price action. And lousy, interim, on currency,” Mr. Fuss said of some bets. “You’ve had — people call it a flight to quality. I call it something else: a flight to reserve currencies.”
The volatility is nothing new, according to analysts. Mr. Fuss’ fund takes a great deal of latitude in sidestepping bond benchmarks. Mr. Fuss and his co-managers, Matt Eagan and Elaine Stokes, buy stocks as well as bonds. When high-yield bets tanked in 2008, the Loomis team slid more dramatically than the market and 85% of its peer group.
That year, the Loomis Sayles Bond Fund slid 21.82% while the benchmark Barclays U.S. Government/Credit Index rose 5.70%. In 2009, when the financial crisis was still curbing global growth, the fund rebounded to return 37.19% as the benchmark added 4.52%.
“Mr. Fuss and his team are famously eclectic in their style, so it is not uncommon for them to underperform for periods and then dramatically outperform in others — they are not benchmark huggers for sure,” said James L. Dailey, managing director of global sales at Opturo Inc., a financial-software firm.
Mr. Fuss, 81, has built a decades-long track record in bond-picking that’s among the best in the business, and he’s a portfolio manager on mutual funds with $60 billion in assets as well as vice-chairman of Loomis, which manages $241 billion in all. He’s been at the helm of the Loomis Sayles Bond Fund for 20 years.
GLOBAL DIVERSIFICATION CAN HELP
Even a small amount of currency exposure can be damaging. At the end of March, 72.5% of the fund’s holdings were U.S. dollar-denominated, according to company disclosures, leaving little more than a quarter of the portfolio exposed to the fluctuation of other currencies.
(More: Dan Fuss: Risk in geopolitics, high-yield, leveraged funds)
But Sarah Bush, an analyst at Morningstar that covers the firm, said global diversification can be a benefit even if the currencies generate nasty short-term volatility. Ms. Bush said the firm’s foreign bets have often worked to the fund’s advantage. One bet, starting in late 2010, on Ireland at a time when that country’s economic future was in doubt paid off.
“Your portfolio is pretty dollar-denominated,” she said. “Broad moves in currencies tend to shake out over time.”
Mr. Fuss said changing his bets wouldn’t have necessarily been the best idea.
“If I could flip all those things around without cost and had been smart enough to see what is the spike in the dollar that’s dragging along a couple of the other reserve currencies, then it would be better to do that at the beginning of the year,” he said.
But he said doing so would “give up some yield advantage. Quite a bit of it actually. Depending on what you bought, you’d give up some quality.”
Mr. Fuss said he’s “been talking with a lot of clients” on the firm’s performance, and explaining that the strategy that made them successful hasn’t changed. They pick securities based on their “total package” — including credit and, perhaps most importantly, value. He said he’s yet to meet anyone in the business who can forecast currencies well.
“People say, gee whiz, Dan, this is really abnormal for you. I say, no it’s not,” he said, noting that people described him as a having a “magic touch.”
“We have a low correlation to the market,” he said. “That doesn’t mean over time we have low performance relative to the market. Quite the reverse.”
Indeed, not all the numbers are bad. Over 15 years, the fund has returned 8.4% a year to investors, ahead of 91% of its peers. And the firm’s $1.2 billion Global Equity and Income Fund (LGMAX), also managed in part by Mr. Fuss, is near the top of its category for the year.

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