Online Extra: Q&A with Daniel Fuss
When it comes to fixed income, Daniel Fuss, manager of the $190 million Managers Bond Fund (MGFIX ), doesn't like to hide in corners. The fund, a diversified portfolio of 133 holdings, has turned out an impressive annual average return of 8.4% for the last 10 years (through February), beating many of its peers and winning Fuss a 2004 S&P/BusinessWeek Excellence in Fund Management Award. The 70-year-old manager is better known for being the master behind the $2.3 billion Loomis Sayles Bond Fund (LSBDX ). He enjoys long walks and favors sweater vests. In conversation, you'll often hear him say "golly" or "jeepers."
BusinessWeek's Lauren Young recently spoke with Fuss about his investing strategy. Edited excerpts of their conversation follow:
Q: What's the history of the Managers Bond Fund? How did you get involved? A:
Q: What's the history of the Managers Bond Fund? How did you get involved?
A:I started working on the fund when Managers started it on June 1, 1984. At the time, it had three managers. Then, in the fall of '94, Managers gave all the money to us. More or less, for nearly all that time, the fund was long, and preferably call protected. Now, that's no longer true.
The average maturity is 9.1 years and the duration is 5.6 years. As rates go down, duration tends to extend. Over the last year, we've really changed the nature of this fund. The duration used to run around 9.5 to 10. It was very, very long, and well call-protected. The average maturity was close to 20 years.
Q: How does the Managers Bond Fund differ from the Loomis Sayles Bond Fund? A:
Q: How does the Managers Bond Fund differ from the Loomis Sayles Bond Fund?
A:Like Loomis Sayles bond fund, it isn't restricted in maturity or duration. But the Loomis Sayles fund can invest in the emerging markets. For the Managers Bond Fund, there's a restriction in quality. I cannot buy anything rated below investment-grade. That rules out the vast majority of emerging markets issuers.
The Managers Bond Fund can hold up to 10% of its assets in below investment-grade securities if it gets there by being downgraded. But there's not much incentive in buying bonds that are being downgraded. Once in a while the price will get there before a formal rating.
Q: What kind of securities are in the Managers Bond Fund? A:
Q: What kind of securities are in the Managers Bond Fund?
A:If you look at composition by major category, 42% is in Treasuries. Cash is 7.4%, which is a little on the high side. We set some money aside. This market is getting a little bumpy. Government agencies account for 26%.
Then we've got mortgage-related debt at 8.4%. We aren't big mortgage people. This is a good example what you can do in a fund this size. It wouldn't make a hill of beans difference in the [Loomis Sayles] bond fund. We will do oddball things. For example, we own AAA-rated community loans, which look a lot like asset-backed securities. You wind up getting substantially more yield on a handful of bonds.
We haven't been buying convertibles, but we can buy them. The problem is the pricing. Right now they are tremendously overpriced. The yield on the portfolio is 4.30% and average quality is doubleA2.
Q: Does the small size of this fund affect the way you select securities for the portfolio? A:
Q: Does the small size of this fund affect the way you select securities for the portfolio?
A:With $190 million in assets, it's not humongous. You can do things with a fund of this size -- one or two items can make a difference. It's what we refer to here as a sort of a Lucky Eddie fund. I have a cousin named Ed, who is the luckiest person in world. Any variable always breaks his way. It's sort of the same with this fund.
Our style is not a hide-in-the-corner type of style. There is risk in this fund. We've got a well-diversified portfolio of 133 holdings. We use a little tiny bit of credit -- 3.4% -- below investment grade. These are fallen angels that were downgraded from investment-grade status.
We also use currency risk. Right now, 9.5% of the fund is non-U.S.-dollar [assets]. The maximum is 10%. Foreign securities tend to be real dampeners on volatility. It surprises me how much it tones down the bouncing of the fund -- it moderates the bouncing around.
Q: What's your take on interest rates? A:
Q: What's your take on interest rates?
A:We're ready for a rise in interest rates, yet we haven't had to give up completely on income. I personally don't think we will see a rise in short rates for the balance of the year. I think the Federal Reserve will wait until after election. That's the way it feels right now.
If the dollar continues to go south, that might change. But I do think long-term rates and inflation are headed higher, and that could happen more quickly.
Q: Could you give an example of the kind of debt the fund owns? A:
Q: Could you give an example of the kind of debt the fund owns?
A:We own ASIF Global, it's issued by AIG (AIG ), the insurance company. It's AAA-rated, maturing in 2009 and payable in Singapore dollars. It's an interesting play on Asia. It's perhaps the only market I know of where as the economy gets stronger, interest rates once in a while go down.
How could that be? It's because of the way they manage themselves. They have a huge current-account surplus, when things are heating up, [they] let the currency go and find its level. As a result, people pile into the Singapore dollar and rates go down. That's what has been happening.
Q: Is it true you get up for work every day at 4:28 a.m. without an alarm clock? A:
Q: Is it true you get up for work every day at 4:28 a.m. without an alarm clock?
A:Yes, but on the weekend I sleep a bit later, usually until 5 a.m. I like to take long walks. That's when I like to think. Lately I've been doing a lot of walking.