Bond guru Dan Fuss doesn't see bond bubble

Wed Nov 28, 2012 7:51am EST

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(Reuters) - Dan Fuss, vice chairman and portfolio manager at $182 billion Loomis Sayles & Co., thinks bonds will still be the place to be in 2013.

One of Wall Street's original kings of bond investing, said in an interview that fears the market for fixed income securities is in a bubble are overstated. The 79-year-old Wisconsin native characterized the performance of most bonds this year as simply reflecting "a very strong market", but one with more room to grow.

Indeed, this year, junk bonds and corporate debt markets have seen strong demand as the ferocious hunt for yield shows no signs of slowing with the JPMorgan Global HY index's year-to-date return up 13.6 percent and the JPMorgan IG index return up 9.6 percent.

Returns from investments in those securities are now coming down significantly in the wake of global central bank policies intended to suppress borrowing costs.

That is forcing some money managers to get out of their comfort zones and take on much more risk than they would otherwise.

Fuss isn't one of those who is worried.

"I wouldn't call (this market) a bubble - I'd call it a very strong market," Fuss, said in an interview with Reuters TV for the Reuters Global Investment 2013 Outlook Summit that began on Monday.

"It's hard for bonds to bubble. It's easy for them to go the other way but it's hard for them to bubble because you're dealing with fixed contracts."

Sitting down for the interview at a popular Manhattan ice cream shop, Fuss, who has ice cream at least once a week, said when it comes to bond prices people often don't understand what a true bubble is.here

"There's a limit you say 'Oh My Goodness, it was issued at 100 and it goes to 116' and you think that's a bubble - no that's not a bubble," said Fuss, eating chocolate ice cream. He was referring to the price of a bond that trades 16 points above its face value of 100 cents on the dollar. "If it goes to 250, that's a bubble and that doesn't tend to happen with bonds."

Still, it will be hard for 2013 to top this past year in many respects. Global high yield corporate debt issuance now totals $341.6 billion in 2012 year-to-date, surpassing the all-time annual record $322.9 billion set in 2010, according to Thomson Reuters figures. And so far, bond funds, including ETFs, have taken in over $283 billion, according to Lipper data. In comparison, mutual fund-only outflows from equities is $62 billion, an improvement over last year's $94 billion outflow.

Fuss is known for his deep research on corporate credits and huge winning bets on unloved and battered debt securities, such as Ireland's bonds last year. He has brought huge returns for his investors. The Loomis Sayles Bond fund (LSBDX) is up 12.86 percent so far this year. On a three-year annual basis, it is up 10.32 percent. Over five years, the fund is up 7.38 percent on an annual basis.

GAFFNEY GONE, NOW WHAT?

Asked about Kathleen Gaffney, who was seen as his likely successor and recently departed for Eaton Vance Corp., Fuss said: "Number one, Kathleen got a very attractive offer. Number two, 10 years ago--boy, time goes by--we set up something called the 'full discretion' team. Kathleen and Matthew Eagan and Elaine Stokes were listed co-portfolio managers in the mutual funds and that was the day that I decided to hang up my spurs and go out and eat ice cream full time."

Eagan and Stokes were both named co-PMs on the mutual funds since 2007, although both have been co-PMs on the institutional products for even longer. "They would take over," the Loomis Bond fund, Fuss added. "We added three more members to the team as the years went by. But they were not listed as co portfolio managers, plus there are four allocators with the account and one of the team sits in trading who can keep us informed about what is going on in the office."

TOP OF HIS WORRY LIST

Looking ahead to the new year, Fuss said at the top of his worry list is the political disruption that's possible around the world.

"Specifically, I worry about the Middle East and the South China sea (tensions)--those two areas of the world--and what you want when you're running money, the critical thing is you need peace," Fuss said. "The fiscal cliff and all that, it's a worry. The big thing, though, is this all going to end. People are shooting at each other and right now I have my hopes and my prayers. But I do see risk out there as there always is."

To see the Reuters TV interview with Dan Fuss, click here: reut.rs/11baXyc and here

(Reporting By Jennifer Ablan; Editing by Matthew Goldstein and Andrew Hay)