Loomis Sayles fund bets everywhere but Treasuries

BOSTON Wed Mar 14, 2012 10:27am EDT

Dan Fuss, vice chairman of Loomis, Sayles & Company, gestures as he speaks at the Reuters Investment Outlook Summit in New York December 5, 2011. REUTERS/Brendan McDermid

Dan Fuss, vice chairman of Loomis, Sayles & Company, gestures as he speaks at the Reuters Investment Outlook Summit in New York December 5, 2011.

Credit: Reuters/Brendan McDermid

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BOSTON (Reuters) - The $14 billion Loomis Sayles Strategic Income Fund defies labeling.

It's not a pure bond fund. It shuns U.S. Treasuries, but likes (some) junk bonds. It makes plays in foreign currencies and stocks, and even bets on value emerging from tattered sectors, such as the airline industry, and U.S. banks waylaid by the 2008 credit crisis.

What the fund is, for sure, is a winner.

On March 8, Lipper - a Thomson Reuters company - awarded it first place in the multi-sector income fund category. During the three years that ended November 30, the fund had an annual total return of 21.2 percent. That performance put it in the top spot among 35 multi-sector income funds that had a return of 14.06 percent on average, according to Lipper.

It was also the winner in terms of 10-year annual total returns, racking up a yield of 10.79 percent, compared with the group average of 6.68 percent, according to Lipper.

Kathleen Gaffney, vice president and fixed-income portfolio manager at Loomis Sayles, and a team led by Loomis Sayles Vice Chairman Daniel Fuss, have done well by avoiding U.S. Treasuries and embracing investments such as convertible debt issues, which have generated handsome returns because of their sensitivity to the stock market's upswing.

RISK IN TREASURIES

"Treasuries have a lot of risk. There's interest rate risk if the economy gets strong legs," Gaffney says. "And if we inflate our way back to economic stabilization with continued quantitative easing ... returns on Treasuries going forward look pretty abysmal."

The daughter of an ad salesman, Gaffney grew up in Connecticut and studied economics at the University of Massachusetts at Amherst. After working as a grocery store cashier, she landed a job at Loomis Sayles. She started running money in 1992 and today oversees nearly $50 billion in assets across several funds, including co-managing the firm's flagship $20 billion Loomis Sayles Bond Fund.

The award-winning Strategic Income Fund has made moves on a number of fronts to generate sector-beating returns.

With investments in the convertible bonds of Ford Motor Co, the fund has bet the carmaker can produce strong long-term stock returns. It has capitalized on Big Pharma's growing dependence on much smaller biotech companies such as Vertex Pharmaceuticals Inc to produce new drugs to fill pipelines.

The fund also benefited from investment in high-yield financials. It has exposure to credit crisis blowup victims, including Citigroup Inc, Bank of America Corp and American International Group Inc.

TECH-SECTOR VALUE

Gaffney says she sees attractive valuations in the technology sector, naming Ciena Corp, Micron Technology Inc and Intel Corp as examples.

"They do what America does best if we're going to pull ourselves out of this and stay on top," she says.

The fund is comfortable overseas, too, snapping up holdings in several foreign currencies, most notably Australian and New Zealand dollars.

Some European corporate-debt issues pegged to the dollar also present the fund with a mismatch between price and risk. Gaffney says investment-grade European telecoms and utilities were trading at junk-bond prices.

"We see a number of credits trading that way," she says. "And people are still going to need their cell phones."

Asked what keeps her up at night, Gaffney says geopolitical risk.

"If you look back at history, and after every financial crisis, there's a sovereign debt crisis," Gaffney says. "And with the sovereign debt crisis, there are large debt burdens. This creates a lot of competition for resources to get growth. That has always led to some sort of conflict. You see that happening in the Middle East."

(Editing by Jilian Mincer and Bernadette Baum)

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