Fund Managers’ Views

Loomis Sayles has seen the yield of its flagship Bond Fund (LSBDX) climb to 8.53%.  But year-to-date returns through October 10 had cratered by more than 25%.  Portfolio co-manager Daniel Fuss acknowledges that the firm, after successfully sidestepping the subprime mess, moved too early into the falling corporate debt market in late 2007.   

But Fuss believes that “once the systemic pressures ease and liquidity returns, debt holdings will rise significantly as underlying fundamental value is recognized.”

He points to a recent report his firm published that tracked the performance of Treasuries, high-grade, and high-yield bonds during the last three crises: the Savings & Loan debacle of the early 1980s, Long-Term Capital’s implosion coupled with the tech collapse, and the current sub-prime meltdown.

During the first two events, investment-grade and high-yield bonds underperformed Treasuries.  But in the periods that followed the crises, as spreads reverted to their pre-crisis level, corporate bonds significantly outperformed Treasuries.

But this begs the question: is the current meltdown comparable to those previous crises, where the underlying financial system wasn’t being challenged, or are we dealing with a systemic failure?  Not knowing is the rub.

A key reason why so many big-name investors have been taken to the woodshed by the current sell-off is that, even after a year since the symptoms of the financial crisis were made public, we still don’t know how sick and how contagious the banking system is.  We still don’t know what percent of their assets are infected.  We still don’t know the scale of credit default swaps that have been underwritten and who is on the hook for them. 

Government officials are only now admitting that they should’ve taken action much earlier than they did.  Such a statement is deeply troublesome, making us wonder, what did they know and when did they know it?  With such ambiguity, there is little way to have confidence in anyone’s call that the worst is over—even when it is.

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