Fund manager Q&A: Loomis Sayles' Elaine Stokes on bond fears

AP News
Posted: Oct 29, 2015 4:17 PM

NEW YORK (AP) — Bonds aren't boring anymore.

For decades, bond funds delivered not only decent income but also steadier returns than stocks. Now investors fear that the great run is over and a great bust is on the way. Bond yields are ultralow and set to jump higher, the thinking goes, and rising rates mean lower bond prices.

To make matters worse, fund managers are also finding it tougher to find buyers when they want to sell bonds. That has investors heading for the exits. They pulled more than $8 billion out of bond mutual funds and exchange-traded funds in September, according to Morningstar.

Elaine Stokes says these fears may be overdone. She is a portfolio manager at the $19.7 billion Loomis Sayles Bond fund, which invests in everything from Treasurys to high-yield bonds issued by companies with weak credit ratings to Canadian debt. She spoke recently about how investors should view their bond funds. The interview has been edited for length and clarity.

Q: Should we even think of bond funds as income-generating investments anymore? Or are they now just steadying anchors for our portfolios when stocks are shaky?

A: Let's face it, there is not a lot of return in this environment. But there isn't inflation either. So your money goes a little bit further when there isn't inflation.

I think any portfolio should have an anchor that provides that income generation. And the income that's available to us today is better than it was a year and a couple months ago, because risk is being priced a little more appropriately. So if you can get that 3 to 6 percent, I think that's attractive for the average investor.

Q: But to get 6 percent, you have to buy riskier things, like high-yield bonds or foreign bonds, right?

A: You have to get riskier, yeah. That would be high-yield and non-U.S. markets.

Q: And if someone's looking at their bond fund as an anchor, should they really be in those riskier things?

A: If you're buying U.S. Treasurys at 1 to 2 percent, and interest rates rise, you're not going to make any money. But if you're adding in some diversified, well-researched risk, you will have a positive return.

Q: The Loomis Sayles Bond fund can hold as much as 35 percent of its portfolio in junk bonds. Are you close to that?

A: We're pretty close to that. It's been a really interesting environment, because the baby got thrown out with the bathwater. With the falling price of oil last year, and metals this year, it feels like there's been a significant amount of panic in the high-yield market. When bond funds are having withdrawals, and they can't sell or don't want to sell the oil bond or the metals and mining bond, they're forced to sell what's liquid, and that brings all prices down.

Q: You brought up liquidity. There's been a lot of consternation about how much tougher it is to find buyers for some bonds.

A: Liquidity absolutely stinks. That said, it's not a new phenomenon. I find it fascinating how much it's being talked about, liquidity today, when we've been dealing with these markets since 2008, 2009. I was more worried about liquidity then. Now that we've had time to figure it out, adjust our portfolios and have a better sense of how to operate in these environments, it's less worrisome to me.

Q: So it's not any more difficult to find a buyer for a bond today than a few years ago?

A: It really depends on the day and the bond. That's just the reality of it. There isn't a market for every bond every day. But for the vast majority of the portfolio, there absolutely is a market.

Q: Do you see it being a non-event when the Fed does finally raise rates that first quarter of a percent, given how long everyone's been anticipating it?

A: That's what it feels like. I don't think anything in this environment can be a complete non-event. There are just so many participants in the market. But give it 24 hours, and it becomes a non-event.

Because what's a quarter of a percent? It's not going to derail the U.S. economy. We're still at historically low interest rates. A quarter of a percent is not a big deal. It's more about the pace (of increases) than it is about the actual level.

Q: So, as long as the Fed's rate hikes are slow and gradual, everything's fine?

A: Exactly. That's the perfect environment.

Q: Any misconceptions you see in the market right now?

A: The amount of panic over not so much happening seems a little unfounded. The amount of panic about liquidity. Everyone needs to calm down a little bit. This environment is not so dire. My biggest fear, the thing that keeps me up at night, is that the panic becomes self-fulfilling.