Performance of Highly Touted Bond Fund

Take my word for it - you have to search long and hard to find someone who would claim that Dan Fuss is not one of the smartest bond people in the business.  He is not only smart but also, at 72 years of age, has the all important experience.  In my book, he is one of the top 3 in the business.

So, why wouldn't an investor just bypass bond index funds and go with the smartest, most experienced in the business?

Good question.  It came to mind as I read "Bonds Most 'Overbought' in 55 Years, Loomis Sayles's Fuss Says" by Bloomberg writers Steve Bailey and Emma Charlton.  The article mentioned that Fuss is starting a U.K. Fund 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.

This caught my eye and got me to look a bit closer at how the fund has performed.  So, over to Morningstar I went and plugged in the ticker symbol.  The following table shows performance (just click the "performance" tab on the Morningstar home page) on an annual basis starting with 2007 along with performance on the Barclay's Aggregate Index.

	2007	2008	2009	2010	2011	2012
NEFZX	7.26	-23.15	39.3	13.53	3.35	13.56
Agg. Bond  Index	6.97	5.24	5.93	6.54	7.84	4.21

 
So the natural question is:  how would an investor in this fund have performed starting on 1/1/2007, compared to the overall bond market?  One thing to note is that NEFZX is a Class A (Class A here doesn't mean superior!) fund with a 4.5% load.  This means that putting up $100 results gets $95.5 invested.  So, here's what starting with $100 under the alternatives looks like:

	12/31/2007	12/31/2008	12/31/2009	12/31/2010	12/31/2011	12/31/2012
NEFZX ($95.50)	102.43	78.72	109.66	124.50	128.67	146.11
Agg. Bond Index ($100)	106.97	112.58	119.26	127.05	137.02	142.78

 **102.43 = 95.50 * 1.0726

As shown,  NEFZX has outperformed.  For an investment of $100,000, the difference ($146,110 - $142,780) amounts to $3,330.  But look at the ride the investor experienced!  It wasn't until last year where he or she pulled ahead and, at one point, was under water by more than 20% for a bond fund. The Barclay's Index, which can easily be tracked by a low-cost exchange traded fund, was never under water and had a positive return in each year.  To be fair, NEFZX does allow up to 35% in equities; and this is what apparently hammered the 2008 results.

In the real world,  emotions come into play. The pulling ahead in 2012 is for naught if the investor bailed early.

Bottom Line

As mentioned, Dan Fuss is one of the top bond managers in the business.  In my book, he's a genius.  If I was to use an active fund, it would be one of his.  The main point, however, is that good returns can be accompanied by volatility that investors and especially retirees aren't comfortable with.  Before investing in any fund, it is worthwhile looking at yearly results with the question of whether you can withstand the ups and downs.  As Bogle and others have said, the Funds do fine over time but investors in them don't, because they are in and out at the wrong times.