Portfolio managers are prone to hyperbole. Especially bond managers.
The likes of Jeffrey Gundlach and Bill Gross don’t seem to go a month without an apocalyptic warning about ‘black holes of liquidity’ or ‘supernovas of debt.’
A clickbait hungry media is complicit here and investors could be forgiven for building up a certain immunity to words of warning about the next crisis or systemic risks in the bond market.
But such headlines should probably be heeded, especially when they come from a sage like Loomis Sayles veteran Dan Fuss. At 83-years-old and with a 58-year investing career behind him, there are few managers with the knowledge of greater context in which to frame today’s markets.
And while Fuss is cautious about the state of things today, he could certainly not be accused of hyperbole. In fact, he seems intent on not giving anything resembling a quote. When we speak, after a media luncheon, by his own admission Fuss has just spent a two hours avoiding questions from around 30 journalists gathered in New York. No mean feat.
Proceed with caution
Still, Fuss is not completely unfazed by life in 2017.
‘I have not seen anything like it before,’ he says. ‘Does it worry me? Yes it does,’ he continues, referring to the geopolitical situation in the US and Europe, specifically the polarized nature of the US Congress following the presidential election of Donald Trump.
In general, his views on the geopolitics refer beyond the US to the rise of more extreme left and right movements in Europe too, most clearly manifest in the UK’s Brexit vote.
‘The geopolitical and political environments are far from normal. Normal being the most recent 15 years,’ he says. ‘There is more to worry about now than there was a decade or two ago. For a long time after the [Berlin] Wall came down you could say: “Gee, things are getting better here”. And they were. It was a pretty nice time. Then a couple of years back they weren’t getting any better but they weren’t getting any worse. Now in more recent years, they certainly aren’t getting better and they are starting to get a bit worse.’
Fuss’s caution has meant he has become ‘a touch more conservative on credit’ and he has shortened average maturity in the funds he runs.
He has also been selling down high yield, although this has actually increased as a proportion of the Strategic Income fund because the value of his holdings have appreciated, thwarting efforts to trim the position.
His caution is not entirely due to the polarized political landscape but also to an anticipated environment of consistently rising rates in the US, with the Federal Reserve suggesting it will hike every other meeting, depending on data.
Fuss’s returns since the launch of the strategic income fund
Fuss and co. have rotated into short-term, highly liquid agency debt and short-term US treasuries, a move that has given him larger than usual buying reserves but has sacrificed yield.
‘[We] still out-yield the average bond fund by a comfortable margin, but not by as big a margin as we otherwise could,’ he says. ‘Do we have buying reserves? You bet we do. Are they larger than normal? By a lot, yes.
‘It depends on the circumstance as to whether having reserves is a good thing or not. When you think rates really are going to go up, pushed up or led up by the central bank, that’s a good time to have reserves. When you don’t see that, that’s normally not a good time.
‘I do think rates are going up and will do so for quite a while. How far and what will interrupt it I really don’t know. If things stay peaceful I think we will see a gradual rise in rates, all things being equal, 3% on the 10-year at year-end is still reasonable.’
Fuss’s caution of, rather than enthusiasm for, rising rates is born out of experience.
Although the majority of bond managers have worked their entire career to a prevailing backdrop of declining rates, Fuss has a longer memory.
‘When for years things have gone one way, it’s hard to see them go the other way. And when they are going the other way, it’s hard to imagine the amplitude of the swing,’ he says. ‘I am more afraid of substantially higher rates because of the damage it can do, more particularly because of what is most likely to cause it.’
Both of Fuss’s biggest funds have witnessed sustained outflows over the past 12 months
It runs in the family
Fuss co-manages the two funds alongside a star line-up of Matthew Eagan, Elaine Stokes and Brian Kennedy, but has no plans to call time on his lengthy career just yet.
When asked how long he will stay at Loomis Sayles, he jokes: ‘As long as they’ll put up with me.’
He has tried spending more time at home before, but it did not end well.
‘[My wife] Rosemary used to push me on retirement,’ he says. ‘When the children were older she really started pushing. I wound up having to stay home with an ear infection and I was helpful at home, I thought that would impress her. We organized the kitchen for example, it was so disorganized. I was supposed to stay home another two weeks but one morning, I was getting antsy and I said: “Rosemary I’m ready to go back to the office.” I was expecting her to say no, but she said: “Good, can I drive you to the train.” And from that day on the subject has never come up again.’
Given Fuss’s father worked until he was 87 and his grandfather an even more impressive 95, perhaps such dedication is to be expected. Even a manager who has seen it all hasn’t seen anything like this and he wants to know what comes next.