What's the Fuss About?

04/02/2004 12:00 am EST

Focus:

Walter Frank

CIO, MONEYLETTER

An "exciting bond fund" may sound like a contradiction in terms, but in his review of multi-sector funds, Walter Frank, chief investment officer of MONEYLETTER says, "We have found an outstanding fund for you to consider." Run by Dan Fuss, this bond fund was up 28% last year.

"We are taking a half step away from the high-yield bond funds that have proven successful for us, and we are now moving to multi-sector funds. High-yield funds only invest in the domestic high-yield market. But multi-sector funds can move among various types of bonds, both for safety and return. Our top conservative recommendation is Loomis Sayles Bond Fund Retail (LSBRX ), which can spread risk among high-yield, some emerging market debt, and some higher-yielding, but also high-rated, foreign debt.

"Dan Fuss may not have as recognizable a name as PIMCO's bond guru Bill Gross, but this bond manager has steered the fund to a top-decile performance over the trailing one-, three-, and five-year periods versus its peers. And a 28.5% total return in 2003 just about topped the bond fund charts. Fuss acknowledges that bond market conditions were right for his fund last year, but his skill as a manager put the fund in a position to take advantage of those conditions. Fuss was recently selected by BusinessWeek magazine as one of its 'Nine Best Mutual Fund Managers for 2004'. An obvious choice, in our opinion.

"Fuss and co-manager, Kathleen Gaffney, run the fund like a value manager runs an equity fund; they often buy bonds in out-of-favor sectors. They look for bonds that are undervalued when compared to historical averages, while assessing the strength of the issuer. And while many bond mangers seek a combination of income plus capital appreciation, Fuss focuses solely on income, believing that the bulk of total return comes from coupon payments. Hence, the portfolio is often loaded with high-yield and corporate bonds, often those expected to experience credit upgrades.

"Typically, the fund's portfolio turnover runs around 25% a year. But 2003 was different. With the stock market rebounding and interest rates still at record lows, Fuss decided it was time to get ready for a change in the trend of interest rates. He began to reorganize the fund's portfolio beginning in late 2002, with the aim of shortening duration (a measure of interest rate sensitivity), which will help protect the fund's value when interest rates increase. He reduced the fund's exposure to debt sensitive US interest rates, while increasing the fund's high-yield and foreign holdings. As of year end 2003, 29% of assets were in high-yield debt, 27% in emerging markets, and another 18% in global government debt- areas where Fuss believes the best opportunities lie."

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