When Those Interest Rates Rise, Opportunity Knocks

Daniel Fuss is not just searching for silver linings in what has been a cloudy first half for bond mutual funds. He truly believes that investment conditions have changed for the better.

Fuss, named the top bond fund manager of 1995 by researcher Morningstar Inc., likes the fact that interest rates have been rising in 1996. So what if prices for bonds--and thus bond mutual funds--have eroded as rates moved higher?

“The good news is that reinvestment rates have soared,” Fuss says.

The Loomis Sayles Bond Fund, which Fuss manages, sports a current yield above 7.6%, giving it more than a 4-percentage-point advantage over the inflation rate.

“Returns on a bond portfolio will, in fact, be a function of the average yields in the marketplace over time,” he says. “My basic fear is that interest rates will go down.”

Fuss, who heads the bond department at Loomis Sayles, says he would fold his fund if rates dropped sufficiently.

Fuss, 62, has spent nearly 40 years in the bond market.

The Loomis Sayles Bond Fund (no-load, [800] 633-3330) is a $300-million portfolio. Fuss also runs two smaller portfolios, Managers Bond Fund (no load, [800] 835-3879), given a top rating by Morningstar and an average mark by Value Line, and the newer New England Strategic Income A (maximum 4.5% load, [800] 225-7670), which has not been rated by either.

But it’s from Loomis Sayles Bond that he’s best known. This fund, a bit riskier than the typical bond portfolio, debuted in mid-1991. On a total-return basis--including income as well as capital gains or losses--the fund’s value rose 14% in 1992, gained another 22% in 1993, slipped 4% in 1994 and surged 32% last year. It’s off about 1% this year.