The Man Who Knows How To Beat The Bond Market

Mutual funds

April 20, 1997|By Steve Bailey and Steven Syre | Steve Bailey and Steven Syre,BOSTON GLOBE

It's been nearly two years since Fidelity Investments blew up its bond department, abandoning a high-risk, high-reward strategy in which bond managers came to work every day intent on beating the averages just like their higher-profile brethren on the equity side of the house.

Burned by risky investments in derivatives and the Latin American debt, Fidelity's top executives pulled the plug on their aggressive bond managers. Today, Fidelity's bond shop is a far more boring, if predictable, place, one designed to produce no surprises and returns that slightly exceed the market.

Pardon Dan Fuss while he gags.

"We're a performance shop," says Fuss, who runs the bond department at Loomis Sayles Funds in Boston. "People don't come in, pay our fees, looking for an index. They want an index, they go to Vanguard, Fidelity, or wherever."

If Fidelity has given up trying to beat the bond market by much, Fuss is a manager who has shown you can do just that, and by a wide margin.

Over the past year through the end of March, Fuss' Loomis Sayles Bond fund had a total return of 11.11 percent, compared with 4.95 percent for the Lehman Brothers corporate index.

For the last five years, his fund had an annualized rate of return of 13.49 percent, compared with 8.08 percent for the Lehman index, an amazing spread in the bond business.

Last year Kiplinger's Personal Finance magazine called him the "Best Bond Picker in America," and Morningstar Inc., a fund-tracking firm, chose him as its bond manager of the year for 1995. Today he carries Morningstar's highest rating, five stars.

How does he do it? Believe it or not, with an old-fashioned 13-column ledger agonizingly filled out by hand by Fuss and his other money managers, noting every transaction and how it fared. He doesn't wear a green eyeshade, but he does use -- no kidding -- a slide rule for his calculations. He doesn't have a computer.

At 63, the contrarian Fuss is no hot-shot fund manager looking to make a name for himself on his way to a high-paying job at a hedge fund.

He has been running bonds since 1958, and he admits that his system is not for everyone. Some prospective employees take one look at those hand-scrawled ledgers and hit the road.

"I'll be the first to admit that it is a tedious, tedious job," says Fuss, who spends up to two hours a day studying his ledgers, and somehow not going blind. Those ledgers, he says, are his "100 push-ups a day."

For Fuss, the hand-written ledgers provide a tangible way of measuring each transaction. The ledger notes when each bond was bought, at what price, and is benchmarked against U.S. treasuries. Managers have to explain why they sold a bond, and how it performed, plus or minus, against those treasuries.

"That puts enormous pressure on some people and they can't deal with it as managers," Fuss says.

While it's interest rates that move the bond market, Fuss is a bond picker plain and simple, looking for a bond that he can buy cheaply before the rest of the world notices.

He made a ton of money a couple of years ago when everyone was bailing out of Digital Equipment Corp. debt, and he repeated the trick when the market was betting that Kmart was going out of business. When Fidelity remade its bond department after the Mexico peso fiasco, Fuss moved in and made a killing.

What Fuss is looking for in a bond is "yield advantage" over the market -- income per dollar of original investment -- and the most "call protection" he can get against a company redeeming its bonds early. He also wants to get into companies that are improving their finances, but says that is tricky because upgrades by the rating agencies can be bad news for bond prices, since it makes it easier for the companies to refinance, and redeem, their bonds.

Life is getting tougher, he says. "This used to be a lonely occupation. No more. You used to have a meeting for credit analysts and two used to show up. Now they rent the New York Hilton. So you have to take a different approach and look a little ahead in the cycle and in areas that other people don't want to be in."

Fuss manages $9.7 billion of fixed-income assets, including his $700 million Loomis Sayles Bond fund and the $250 million New England Strategic Income fund. Morningstar says Fuss has done a good job managing the relatively high level of risk that comes with the kind of long duration bets he makes in high-yield bonds and emerging markets.

"He's not shy about taking on risk when he thinks you're getting rewarded for it," says Mark Wright, a Morningstar bond analyst. "You shouldn't buy the fund unless you are willing to assume the risk."

For all of Fuss' success, the biggest problem for him and every other bond manager can be summed up in a single word: stocks.

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