Political unrest and generalized global anxiety surrounding pending interest rate increases will play out in the financial markets in the months ahead, Loomis Sayles & Company's leading fund managers told reporters gathered for its annual outlook on April 1. Active fund management, they say, is still the best strategy for navigating that volatility.
The lunchtime event followed a night of success at the Lipper Awards for the 89-year-old Loomis’s fund performance. Loomis received awards for its Loomis Sayles Limited Term Government & Agency Fund, for its Core Plus Bond Fund and for its Institutional High Income Fund. The last is co-managed by Dan Fuss, who is also vice chair of the Boston-based firm.
Fuss led off the outlook with a broad view of current economic influences, after a nod to the difficult New England winter's effect on consumer spending. Gauging consumer demand is hard to predict, he observed. “There seems to be no agreement on the national level of what spending should be. In Boston, though, the hotels clearly did well this winter,” he joked, since guests were snowbound by the city's record-breaking 108-inch snowfall.
On a more somber note, the subject shifted to defense spending and its effect on the U.S. economy.
The global setting “has shifted from peace or lack thereof,” said Fuss. Public support may be rising for U.S. ground troop deployment to fight ISIS. Other areas of friction include the South China Sea and fringes of the old USSR.
“It looks like defense spending is going up,” Fuss said. The defense sector currently makes up 20% of U.S. budget spending.
The popularity of low-yielding U.S. Treasury bonds remains a mystery to many, including David W. Rolley, Loomis’s vice president and portfolio manager and a co-team leader of the global fixed-income group. Economic growth, which might warrant exuberance in such investment, is “mediocre, as are productivity gains,” he noted. With the 10-year note at just 1.6%, “it’s not that we're so terrific,” Rolley said. “We're just less bad than the other guy.” The risk on the 30-year note is no value either, he added.
A better risk/reward play, he said, may be credit rather than debt. Investors are moved by their dislikes, and we might be smart to study what investors “hate” right now, said Rolley. “People hate mills, iron and oil because equity yields are going down. And they hate Brazil.” But, he said, if you lend to those industries, instead of buying their debt, you might get a 5% return. Moreover, if you lend to a Brazil oil company, you might get 7%, he said.
Eileen N. Riley, Loomis vice president and co-portfolio manager for its global equity strategy and global equity and income fund, pegged improved returns on stock selection, especially in European equities, where she expects to see rapid value expansion. But the key, she says, is to pinpoint which sectors or sub-sectors are poised for that growth.
In India, she likes auto part makers. She's watching Autozone because of its market structure, cash flow dynamics and focus on working capital. Denmark-based Novo Nordisk Inc. has grabbed Riley's attention for its approach to diabetes control and focus on insulin delivery systems. Rather than betting on whole sectors for growth, she is building portfolios, she said, “one stock at a time.”