Dan Fuss, whose Loomis Sayles Bond Fund beat 98 percent of its peers in the last three years, said the fixed-income market is more “overbought” than at any time in his 55-year career as he prepares to open a fund to British individual investors.
“This is the most overbought market I have ever seen in my life in the business,” Fuss, 79, who oversees $66 billion in fixed-income assets as vice chairman of Boston-based Loomis Sayles & Co., said in an interview in London. “What I tell my clients is, ‘It’s not the end of the world, but for heaven’s sakes don’t go out and borrow money to buy bonds right now.’”
Yields on government bonds in the U.S., Germany, the U.K. and Australia tumbled to all-time lows last year as Europe’s debt crisis intensified and concern grew that global growth was stalling. Central banks, including the Federal Reserve, Bank of Japan and Bank of England put pressure on interest rates by purchasing government securities to boost growth.
Ten-year Treasury yields, which touched a record low of 1.38 percent in July, were at 2.02 percent at 3:50 p.m. in London today, compared with an average over the past 10 years of 3.64 percent. Germany’s 10-year bund yield slid to 1.13 percent last year, less than half its 10-year average of 3.36 percent.
“The world is changing,” said Fuss, who started in the investment business when Dwight Eisenhower was U.S. President. “We are coming off a period of very low interest rates because the central banks have been buying the bonds. Interest rates are going to go up.”
With the U.K. fund, Fuss will be trying to replicate the success of his $15 billion Loomis Sayles Strategic Income Fund (NEFZX), which beat 94 percent of its peers over the past year and 97 percent over three years, data compiled by Bloomberg show. The pool, which he manages with Matt Eagan and Elaine Stokes, targets corporate, convertible and government bonds worldwide and may invest as much as 35 percent of its assets in equities.
The U.K. fund, approved by the Financial Services Authority today, will limit common stocks to 20 percent and be managed by Fuss and his two colleagues. Fuss said he is the largest individual investor in the U.S. version of the fund, adding he has “a very meaningful amount” of his wealth in it.
Calling the risk in the bond market “very high,” Fuss said he sees opportunities in government bonds in Canada, Australia and New Zealand, companies with strong credit ratings as well as those likely to experience upgrades.
He has cut the maturities of the bonds the fund holds by half in the last four years and in October started reducing his holdings in junk bonds and emerging markets. The new issues market is particularly risky, he said.
“High-yield is as overbought as I have ever seen it,” Fuss said. “This is absolutely, from a valuation point, ridiculous.”
The average extra yield investors charge to hold high-yield bonds instead of government bonds dropped to 493 basis points on Jan. 28, the lowest level since May 2011, according to the Bank of America Merrill Lynch Global High Yield Index. Junk bonds are high-yield, high-risk securities ranked below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is the equivalent of 0.01 percentage point.
Fuss is most closely associated with the Loomis Sayles Bond Fund (LSBDX), which beat 96 percent of peers in the past year and 92 percent over five years, according to data compiled by Bloomberg. He has been at Loomis Sayles, a unit of Paris-based Natixis (KN), since 1976 and plans to work for years to come. His father, he said, worked into his late 80s and his grandfather ran a tavern until he was about 90.
Natixis said in a separate statement that the Strategic Income Fund is the first of a line of sub-funds it plans in the U.K.
To contact the reporters on this story: Steve Bailey in London at firstname.lastname@example.org; Emma Charlton in London at email@example.com