A few days after the Red Sox won the baseball World Series, Loomis Sayles' Dan Fuss was in New York, and the legendary Boston-based money manager couldn't help but gloat a bit at the expense of Beantowns's arch rivals the New York Yankees.
"The Red Sox do tend to beat the Yankees," Fuss, 80, quipped.
Fuss, as it turns out, has many other things to gloat about these days. His $21.9 billion Loomis Sayles Bond fund (LSBDX.O) is the top-performing bond fund since its inception in May 1991. Even during this year's rocky bond markets, the fund has outperformed 86 percent of its peers.
But Fuss, who is sometimes known as "the Buffett of Bonds" - after investment guru Warren Buffett - has been favoring stocks this year.
"At the beginning of the year, I was saying I had a strong preference for stocks because specific risk is what you want," Fuss said in a recently taped interview with Reuters TV for the Reuters Global Investment 2014 Outlook Summit that begins Monday
With the Dow and Standard & Poor's 500 hitting record highs again last week, Fuss said his preference between equities and fixed-income "is more balanced now but still an edge toward stocks, although the list has slimmed down."
Fuss is not alone among major bond investors who are finding more to love in equities these days. Jeffrey Gundlach, co-founder of DoubleLine Capital, told Reuters last week that the U.S. stock market is the "only game in town," though he said he would be hesitant to add new money in equities because "I don't like buying high.
"We've been buying good individual opportunities" in both stocks and bonds, said Fuss, who has been at Loomis Sayles since 1976 and is the firm's vice chairman. He helps oversee all the $193.5 billion in assets managed by Loomis Sayles, a subsidiary of Natixis Global Asset Management.
Even so, Fuss said he sees value in high-yield junk bonds and investment corporate debt and likes municipal bonds for their tax benefits.
"If you're a taxpayer, depending on the state, and in this case the city you live in, the market that I can think has the best potential in a rising interest-rate environment is actually the municipal bond area," he said.
The Federal Reserve's powerful bond purchasing program has influenced the markets, Fuss said, noting the S&P 500's 26 percent gain this year. The benchmark index registered a sixth week of gains on Friday.
"As you go forward in this period of rising interest rates, and we're in it, you'll find that the credit dynamics and the earnings dynamics for corporations start to change," he said. "Now this isn't generally recognized yet, but it will be."
Fuss has not been insulated from the bond market turmoil.
He reiterated that he was blindsided by the bond market's meltdown following Fed Chairman Ben Bernanke's comments on May 22 about ways in which the U.S. central bank might reduce bond purchases.
"The degree of interdependency of the world's capital markets is even greater than I thought," he said. "What happened to the markets in Southeast Asia? What happened to the markets in South America? Ka-womp. The ripple (effects) turned out to be a wave."
Fuss had bought some long-term Treasuries ahead of Bernanke's speech after yields rose in early May to levels he considered "cheap," despite warning for some time of trouble ahead in the bond market.
Even so, his Loomis Sayles Bond fund is up 5.27 percent for the year-to-date, easily trouncing the benchmark Barclays U.S. Aggregate Bond Index, which is down 1.47 percent.
Fuss continues to brace for higher interest rates even as bond yields have edged up since May, when the yield on the benchmark 10-year Treasury note was at 1.65 percent. It is now at 2.70 percent.
Fuss said he believes the Fed will begin to slow its bond buys in March. "If I have to make a guess, I would say the most likely point right now, and this is a guess with a capital G, would be March based on an optimistic view of how the U.S. economy is going," he said.
That forecast puts Fuss just slightly outside the mainstream right now. In the latest Reuters poll, more U.S. primary dealers expect the Fed to scale back on buying bonds before March.
(Reporting by Jennifer Ablan; Editing by Matthew Goldstein and Leslie Adler)