Unique Play Among Bond Funds

07/18/2013 6:00 am EST

Focus: BONDS

Genia Turanova

Editor, Leeb Income Performance

If you worry about rising interest rates and their potential to affect your bond holdings, one of the better choices in the fixed-income universe is the longtime portfolio recommendation Loomis Sayles Bond Fund, says Genia Turanova of Leeb Income Performance.

Naturally, bond prices will decline in a rising interest-rate environment, but Morningstar classifies Loomis Sayles Bond Fund’s (LSBRX) sensitivity to interest rates as moderate; this means that its price should decline less than average in that environment.

Why? The answer to this question lies in the way the fund invests. Its dedication to investing in securities outside its benchmark is legendary, and the most recent period is no exception.

One reason its interest rate sensitivity is less than the average is the fund’s emphasis on higher yields that may act as a cushion against a potential rise in interest rates.

Another reason is the fund’s shorter-than-benchmark duration: As the yield curve steepened during the course of the first few months of 2013, it was positively reflected in its relative performance.

Yet another reason is the fund’s investments in convertible securities and equities (yes, equities, although in modest amounts and restricted to high-dividend ones; the equity exposure was kept at 5.5% at last count).

The ensuing stock market exposure not only assures the fund’s skewed sensitivity to interest rates, but also creates conditions to its outperformance in the periods of strong stock market performance, such as the first few months of this year.

Lead manager Dan Fuss, who has run this mutual fund brilliantly since 1991, understands the importance of fundamental research and broad diversification, particularly in choppy markets.

The fund holds little more than 16% of its total assets in its top ten holdings, compared to the average multi-sector bond fund that invests an average of more than 43% in their top ten holdings.

Year-to-date, the fund has returned 3.7% (which puts it in the top 18th percentile of its universe), and it has remained consistently among the top-performing mutual funds in its group. The fund’s philosophy and current composition continue to make it a buy.

What to do now: For its unique positioning and above-average yields, Loomis Sayles Bond fund remains a buy recommendation.

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