Tag Archive for: bonds

Dan Fuss: Bond investors have learned from experience…not

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In some ways, famed bond investor Dan Fuss is pleased by how far the bond market has come during the last year. October and November 2008 made for a “horrific experience” he said. Since then, bonds have made an incredible recovery. However, their rebound has also brought back some of the behavior that fed their problems, said Fuss to the Fixed Income Management 2009 conference of the CFA Institute on October 1. Fuss is vice chairman of Loomis, Sayles & Company and co-manager of a number of institutional separate accounts for the firm’s fixed income group.

Fixed income’s bleak months in 2008, when it was difficult to get bids for even the highest quality investments left an impact on Fuss. On paper, October and November offered a fantastic buying opportunity. He spoke of a “50-year opportunity in bonds”  in November 2008. Unfortunately, instead bond funds struggled last autumn to sell in response to mutual fund redemptions.

As a result, now Fuss pays more attention to liquidity of his investments, even if it means that “I’m fighting the last war.” Compared to 18 months ago, “I’ll give up something to buy something more liquid,” he said.

Until a few months ago, Fuss thought he wouldn’t see a repetition of the risky behavior that he illustrated with his fable of Colossal Corporation, the world’s largest maker of “colossals,” a product Fuss made up for the purpose of his story. Colossal Corp. began by dabbling in hedging the price of ore and the Australian dollar, and then went heavily into the carry trade. Eventually, it got burned by the credit crunch and decided to give up its speculative ways.

For awhile Fuss thought that the Colossal Corporations of the world had learned the lesson that they should stick to their business rather than speculating in financial markets. “I thought that was all history,” he said. However, over the last three to four months, he observed that “By God, this thing is starting to replay…. The people who skate on thin ice when they shouldn’t are starting to skate on thin ice again.”

Speculation is reviving because of the steep yield curve, said Fuss. There is an enormous incentive to go out the yield curve to pick up yield. He discussed a risky new product that made its debut in Japan in March 2009. The Japanese product is being copied by others. “I can’t believe this is happening,” said Fuss.

Recently, traders at Loomis Sayles told Fuss that he should act quickly if he’d like to get in on a B- credit that would pay a special dividend. “I thought it was a joke,” said Fuss. But it was not.

Bostonians, where will you be on October 1?

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Several events in Boston are competing for financial professionals’ attention around October 1. The first aims at investment managers, while the last two target mutual funds.

  • Oct. 1-2, The CFA Institute’s Fixed Income 2009 conference, including presentations by James Grant and Dan Fuss
  • Oct. 1, NICSA’s East Coast Regional meeting, featuring keynote addresses by Robert L. Reynolds,   President and Chief Executive Officer, Putnam Investments, and Keith F. Hartstein, Director, President and Chief Executive Officer, John Hancock Funds, LLC
  • Sept. 30-Oct. 1, MFWire’s Thought Leadership Summit, billed as “Thought Leadership with …’40 Act Fund Distribution’s Most Influential People” 
    Where will YOU be on October 1?

Fixed income attribution week

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I just learned that the Spaulding Group, which I wrote about in “Fixed income attribution falls short,” will run a week-long series of webinars on fixed income attribution from July 13-July 17, 2009.


If you remember the Campisi model that popped up in my earlier blog post, “Fixed income attribution falls short,” you may enjoy hearing the model explained by Steve Campisi himself in one of the Spaulding webinars. If you attend, please comment on my blog to tell me what you learn!

Fidelity expert: "CMBS Challenges & Opportunity: Are CMBS Securities Mispriced?"

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By some measures, commercial mortage-backed securities (CMBS) are in good shape, according to Mark Snyderman, portfolio manager and CMBS group leader, Fidelity Investments, who presented on “CMBS Challenges & Opportunity: Are CMBS Securities Mispriced?” to the Boston Security Analysts Society on May 5. Still, he answered “No” to the big question posed by his title.


Good news: New construction and cash flow growth
Commercial property is not overbuilt, said Snyderman. In fact, in recent years, new construction has lagged the 2% growth rate needed to keep up with population growth and replacement of obsolete buildings. So, commercial property rents and occupancy should fare relatively well.


Commercial property growth has fallen from its peak. But even in 2009, Snyderman expects it will be flat or perhaps down by single digits. So, cash flow isn’t much of a problem.


Problem: Lack of debt financing to squeeze mortgage borrowers
CMBS delinquency rates could rise to roughly 20 times their current level, which is below 2%, said Snyderman. Commercial real estate is suffering as debt financing becomes less available for highly leveraged properties purchased at historically high valuations. The disappearance of cheap debt financing and concerns about cash flow growth suggest that CMBS delinquencies will increase dramatically.


Pessimism will create opportunities
Investors must approach CMBS cautiously, said Snyderman. They can’t rely on ratings because the ratings agencies haven’t adequately reformed themselves. Instead, investors must do old-fashioned, bottom-up credit analysis on a property-by-property basis. It’s also helpful to consider the “vintage” of a CMBS deal, even though there are deal-by-deal differences. 


Right now, we’re in a wave of market optimism, said Snyderman. But, he predicted, a wave of pessimism will bring attractive opportunities in CMBS.


Fixed income attribution falls short

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Attribution analysis can help investment managers keep their clients, even in down-markets, said David Spaulding, president of The Spaulding Group, Inc. in his presentation on “Fixed Income Attribution: An Introduction” to the Boston Security Analysts Society (BSAS) on March 5. But good attribution analysis has been hard for fixed income managers to find. While equity managers have long enjoyed good models and software, the fixed income world is only catching up now, according to Spaulding. The Campisi model for fixed income attribution offers a solution. 

Explanation of underperformance can save the day
Some managers underperform their benchmarks, but keep their clients because of attribution. How’s that? Attribution helps them to explain what’s working–and what’s not. With that information, managers can reassure clients with their strategies for fixing things. This is a technique I talked about in “How can you report underperformance in your client letters?“ 

Equity-based models don’t cut it
But many fixed income managers create their performance attribution with the equivalent of one hand tied behind their back, based on what I learned from Spaulding. They’re using attribution models developed for equities, which look only at security selection and sector allocation. That’s a poor match for fixed income, where decisions about duration, sectors, and risk levels (ratings) are most important and security selection typically doesn’t count for much.

“If you’re not looking at duration, you don’t have fixed income attribution,” said Spaulding. That’s because the duration decision typically has the greatest impact on fixed income performance. 

Campisi model fixes problems 
The Campisi model, developed by Stephen Campisi, CFA, may help. It is an attribution model with the potential to  play the role for fixed income that two Brinson models play for equities, said Spaulding. The model views bond returns as coming from income in addition to price change. Spaulding ran through the steps in applying the model, including gathering the data, calculating the contribution effect for the benchmark and the portfolio, and calculating the attribution effect.

The BSAS audience seemed receptive to the Campisi model. But some expressed concern about handling derivatives in a fixed income portfolio. Spaulding said that assets that aren’t in a portfolio’s benchmark should be isolated and only their contribution should be discussed. However, I got the sense that managers who invest heavily in derivatives aren’t satisfied with that solution.

It looks as if challenges still remain until fixed income attribution achieves the usefulness of its equity counterpart.

If you’d like a copy of Spaulding’s PowerPoint presentation, e-mail your request to The Spaulding Group.

Goodbye, Lehman Agg!

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The term “Lehman Agg” used to roll off my tongue. I felt like an insider knowing that was short for “Lehman Brothers U.S. Aggregate Index” of bonds.

It feels strange to be typing “Barclays Capital U.S. Aggregate Index (formerly the Lehman Brothers U.S. Aggregate Index)” as I create my fourth quarter performance reports.

Does this make anyone else pause?


I made the Top Ten!

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Well, not me, exactly. My article, “Dan Fuss: The 50-Year Opportunity in Bonds,” made the list of Advisor Perspective‘s top ten most read articles for 2008. 

“Dan Fuss” commanded the #3 spot behind “Jeremy Siegel on Why Equities are ‘Dirt Cheap’” and “Our Interview with Mohamed el-Erian.”

It looks like legendary investors draw readers.

"Dan Fuss: The 50-Year Opportunity in Bonds"

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Opportunities in the bond market are as attractive now as they have been in at least 50 years, according to Dan Fuss, vice chairman of Loomis, Sayles & Company. He spoke on “The Bond Market Outlook” to the Boston Security Analysts Society on November 24. Fuss co-manages numerous institutional accounts, the Loomis Sayles Bond Fund, and the Loomis Sayles Strategic Income Fund.

What kind of bonds does Fuss like–and why? Read my article, “Dan Fuss: The 50-Year Opportunity in Bonds,” in Advisor Perspectives. 

Morningstar’s new bond market commentary is an online "Don’t"

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Morningstar has introduced monthly bond market commentary. 

The August 2008 issue of Morningstar Bond Market Commentary has many nice features. But it also illustrates an important “Don’t” of online publishing.

The commentary is almost impossible to read online. Why? Because it’s formatted in three columns instead of one. 

The bottom line:If you want people to read your commentary online, format it in one column. Otherwise, you’ll lose many readers.

By the way, Morningstar says its bond commentary is designed to be printed out. A three-column layout works fine in hard copy.

Should you hyphenate “fixed income”?

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It depends.

There are two schools of thoughts about whether to hyphenate compound adjectives, which is what “fixed income” becomes when you use it as an adjective. It’s the reader-friendly approach vs. common usage.

Reader-friendly

Let’s talk about “fixed income investing.” When you combine an adjective and noun and then use them to describe a second noun, you’re creating a compound adjective.

You’re also making it more difficult for your readers to interpret your text. They’re used to thinking of “income” as a noun, so they may struggle for a moment before they realize that “fixed income” serves as an adjective in “fixed income investing.” Following this line of thought, it’s kinder to your reader to write “fixed-income investing.”

Common usage

Opponents of writing “fixed-income investing” say “fixed income” is so commonly used as an adjective that a hyphen is unnecessary.

Your decision

Grammar Girl says that you should always consider whether a hyphen changes your meaning. As she points out:

  • A hot-water bottle is a bottle for holding hot water.
  • A hot water bottle is a water bottle that is hot.


The Wall Street Journal uses a hyphen when fixed-income is an adjective.

What’s your decision? Is it fixed-income investing or fixed income investing?

Whichever approach you adopt, be consistent in your usage. That will help your readers know what to expect.

Image courtesy of iosphere at FreeDigitalPhotos.net.