Making a Fuss Over Mr. Fuss
Stellar manager of bond funds ranks tops in performance in 1995
MUTUAL-FUND manager Daniel Fuss attributes his early interest in finance to the fact that his father shared the sports page with him as a boy.
''The Milwaukee Journal had a one-page handout at the end of the day that had the sports news on one side and the financial markets on the other,'' he explains. ''I would read both sides.''
Today, Mr. Fuss is gaining fame as a bond-fund manager with a unique investment strategy and a golden touch. He was recently named domestic bond manager of the year for 1995 by Morningstar Inc., a mutual-fund rating service in Chicago.
An executive vice president at Loomis, Sayles & Co. in Boston, Fuss manages $7 billion of the investment company's $45 billion in assets. Included in that amount is $286 million held in the Loomis Sayles Bond Fund, a smaller mutual fund that was a top performer last year. The return on that no-load fund in 1995 was 32 percent, right up there with the stocks in the Standard & Poor's 500 index (up 34 percent), and better than the Lehman Brothers Long-Term Corporate Bond index at 28 percent.
The five-year-old fund currently leads Morningstar's general corporate bond category for a three-year period, with average annual returns of 15.66 percent.
Mark Wright, a fixed-income analyst at Morningstar, attributes Fuss's success in 1995, and his quick recovery from the 1994 bond bear market, to the way he has structured the fund. Fuss's strategies, Mr. Wright says, reflect his 38 years of experience in investing and the fact that he ''thinks about things differently than most managers do.''
For example, Fuss doesn't like declining interest rates, even though they push up prices of existing bonds. So last week's news that the Federal Reserve cut short-term interest rates by a quarter of a percentage point didn't please the usually jovial Wisconsin native.
''The worst possible environment for a bond fund is to have rates go down,'' he contends in an interview. ''You say, 'Well, gee, how could that be because the total return will be good?' Well, that's true, for that short period of time the total return is going to be good. Unfortunately, you are reinvesting your cash flows at lower rates. So if you're investing for income, and rates go down, in my mind, that's bad news.''
As this process continues, the income provided by the fund to shareholders would start to decline. They might have to draw on principal.
Fuss expects the Fed to cut rates further. ''US short rates are going to continue down,'' he says. ''No one else believes this, but I think we're going at least to 4 [percent].'' Fuss guesses that the drop will happen during the second quarter, possibly before the end of May.
He sees the threat of default on federal debt caused by the budget stalemate in Washington as a damaging development. ''We're a borrower of massive size in the international financial markets, and if you tell people you might not pay them back, it has an impact.''
The possibility of default has already probably cost 35 or 40 basis points - that is, 0.35 or 0.40 percentage points, for long-term bonds, he estimates. This is expensive for corporate or government borrowers. At the short end it has not had as much of an impact, he says.
Fuss is a bit bearish on most domestic investments this year, and has looked outside US borders for good bond buys. The fund, one of three he manages, currently holds 17 percent of its assets in Canadian provincial debt. Another 5 percent is in New Zealand bonds, which he says are a great bargain, and 2.6 percent in Ireland, a country he says ''is in an all-out boom.''
Fuss and his team of more than 30 analysts have also tracked down suitable junk bonds (bonds with low safety ratings and high yields), and Brady bonds (bonds which resulted from the restructuring of the debts of debtor nations), both risky.
''He's just very good at leaving no stone unturned and that means that he finds a lot of underpriced securities that other people don't. So he tends to outperform,'' says Susan Belden, senior editor at the No-Load Fund Analyst, a San Francisco-based newsletter.
Amy Arnott, editor of Morningstar's Mutual Funds summary, says Fuss's flexible strategy is rare, since most bond funds ''tend to be pretty narrowly defined, in that the manager can make certain interest-rate bets, but typically has to stay within Treasuries, or investment-grade corporates.''
Fuss defends his selection of bonds that are considered risky.
''The risk that we protect against is the risk that your income is going to go down.'' He does that by ''staying long,'' that is, holding bonds with long maturity dates, and by having in the fund ''a heavy overlay of investments that do not 100 percent tie into the bond market.'' He uses as examples ''busted convertibles,'' a stock-bond hybrid, and bonds with sinking funds, ones that corporations are near to retiring.
The fund's assets have risen from $80 million at the end of 1994 to today's $286 million. Its assets are growing at 10 percent a month, Fuss says, which he prefers to larger inflows because he can utilize ''fresh ideas'' without constantly restructuring the portfolio.
Fuss, the father of six, says that a major influence on his approach was Arthur Kohaske, the feisty German president of the community bank he went to work for in 1958. ''Mr. Kohaske's rule was, when the economy looks weak, don't make any loans, quick buy long bonds. You'll save the community from itself and get rich in the process.''
Kohaske told Fuss to watch the commodities market for the first signs of slackening business. Fuss still tracks commodities daily.
As for 1996, Fuss says it's not ''going to be a barn-burner of a year in total return'' for bonds.
Still, he says that since interest rates likely will continue down, it is a better year to be in longer maturities than short ones. As for stocks vs. bonds, Fuss says, ''I like bonds more than stocks right now.''