Fixed-income rates seem to be languishing in low single-digit ranges so fund managers are drumming up ideas to keep investors confident in the sector.
Loomis, Sayles & Co., based in Boston, is the latest to do so. The company, which manages funds for institutional and mutual fund clients, launched the Loomis Sayles Absolute Strategies fund (LSYX). The fund takes a global absolute return-oriented fixed-income strategy. It is designed to be an all-weather product for investors looking for consistent returns through all market conditions, the company announced last Wednesday.
Loomis launched the fund in response to interest rates that have been falling for some time, and are expected to decline further, Matthew Eagan, a co-manager of Loomis Sayles’ Multisector Bond funds, said in a phone call on Wednesday. Those investing conditions made it hard for institutional and mutual fund investors alike to reach their return hurdles, Eagan said.
“We had to get away from benchmark investing, the core aggregate,” he said. “We asked: ‘How can we make money and not be concerned with significant constraints, and not be tied to an unfavorable benchmark?’”
The answer, as Eagan and the funds two other co-managers see it, is to set absolute return goals of 6% to 7%, or 2% to 4% basis points over the London Interbank Offered Rate (Libor), whichever is greater. The Libor now yields just 0.78%, so now would be a good time to seek returns of 4% over that benchmark.
“The idea there is that is an attractive all-in return,” Eagan said. Along with co-managers Kevin Kearns, a senior derivatives strategist and Todd Vandam, a senior credit strategist, Eagan says he will pursue a range of securities, including government, sovereign, corporate, currencies, securitized assets and derivatives.
Traditional securitized asset groups like commercial mortgage-backed securities and residential mortgage-backed securities are attractive because issuers with decent fundamentals are still available as value investments. They had been abandoned along with the more risky collateralized-debt obligations, according to Eagan.
Elsewhere, economies like China represent resilient opportunities in both the emerging market and currency categories. Although economic growth in China is expected to cool from its red-hot pace, the country is still expected to maintain high single-digit growth in 2011. On the currency side, the dollar will generally decrease against rising economies like China, whose currency investments are currently below their actual value. Also, the Chinese employment market is beginning to tighten up, meaning wages will have to accelerate eventually.
Coincidentally, Loomis, Sayles launched the fund just as fixed-income investors seemed to make a sharp reversal in their outlook for the sector. The Investment Company Institute reported on Wednesday that U.S. bond funds had $8.62 billion in withdrawals for the week ended Dec., 15, up from $1.66 billion the week before. Those withdrawals represent the largest since the week ended Oct. 15, 2008, when investors pulled about $17.6 billion from bond funds, according to press reports.
Clearly, though, Loomis Sayles is not going to pay heed to the weekly ups and downs of bond market activity with this fund.
“We’ve been working on this strategy for five years now,” Eagan said. “It gets away from benchmark looks to make money as more volatility is coming down the line.”