NEW YORK (Reuters) - Veteran bond investor Dan Fuss' strategy of buying the debt of undervalued companies and holding out for blooming profits has earned his Loomis Sayles Bond Fund stellar returns for decades and is shaping up to do the same in 2012.
Indeed, a prescient bet on Irish government debt illustrates Fuss' strategy in purchasing out-of-favor securities that have eventually paid off handsomely, helping his fund beat 95 percent of his competitors over the first three months of this year.
In the first quarter, the Loomis fund posted returns of 6.59 percent. Its longer-term figures are even better -- a total annualized return of 10.25 percent since its launch in 1991. That beats all of Loomis Sayles' competitors within its peer group of 15 funds with the same history, according to Lipper data.
Fuss, the vice chairman of the $162 billion Loomis Sayles investment firm, was early to see value in battered Irish government debt. He began purchasing in late 2010 and bought more last July when yields on 10-year debt hit a record high of 14 percent.
Irish bond values have increased since July, while yields -- which are inversely proportionate to the value of the bond -- have dropped dramatically. The Irish 10-year bond is now trading at yields of less than 7 percent.
Fuss sees additional value in corporate bonds even after their strong start this year.
"I still like corporate bonds -- and stocks -- even with their price appreciation relative to Treasuries," Fuss said this week. "It's like asking: 'Which of these houses do you buy on a bad block?' Corporates are the place to be."
Bill Miller, chairman of Legg Mason Capital Management, a subsidiary of Legg Mason, said of Fuss: "He has an outstanding record, his market observations are always thoughtful and show great insight, and I think he is one of the outstanding investors in the market today."
TRIPLE-B = TRIPLE-A RESULTS
The flagship bond fund is 50.3 percent invested in corporate bonds, among which the greatest percentage is BBB-rated, on the cusp between investment-grade and junk bonds. The fund also favors maturities of five to 10 years.
Kathleen Gaffney, who co-manages the flagship fund with Fuss, said the firm's research skills and flexibility allow them to think long-term and focus on "looking for best ideas" instead of underweighting or overweighting a benchmark.
This quality distinguishes Fuss from other renowned bond investors, such as Bill Gross, who are determined to beat their benchmark year after year, said Eric Jacobson, director of fixed income research at Morningstar.
Gaffney and Fuss' hunt for value keeps them away from the low yields of U.S. government bonds, though they invest in sovereign bonds in Canada, Mexico, and Brazil. Gaffney also sees opportunities in high-yielding European corporate bonds.
The other funds Fuss co-manages have also performed well this year.
The Global Equity and Income Fund, which Fuss co-manages with Warren Koontz and David Rolley, had the highest return, 11.58 percent, for the first quarter among the seven funds Fuss co-managed.
(Reporting by Sam Forgione; Editing by Jennifer Ablan and Dan Grebler)