A Bond Fund Veteran Bets on Asia


Have you thought about buying Asian bonds lately?

Don't laugh.

Right now, only the most intrepid investors are searching for survivors among blood-soaked Asian stocks--let alone betting on Asian debt. Even then, the only equities you hear mentioned are the ones that everyone has been recommending since late last year--Fuji Photo and Sony in Japan, HSBC Holdings in Hong Kong, Indonesia's Asia Pulp & Paper.

No doubt, in the long run, Asia's biggest blue chips will bob back up to the top. But what will it cost an investor to wait?

Let's say your stake in Asian shares proves to be dead money for two years. Finally, your shrewd guess pays off--the share price jumps 20%. An investor who made 10% a year on a corporate bond is still better off. (10% compounds, zero doesn't.)

That's why Dan Fuss prefers Asia's bonds--he likes being paid while he waits. "If they stay alive, these people keep sending you a check," says Loomis Sayles' veteran fixed-income fund manager, a strong Midwestern twang underlining his pragmatic views.

Fuss is no junk-bond investor, but he can be an aggressive contrarian--he likes cheap bonds. Yet his top-performing Loomis Sayles Bond Fund somehow avoids wild swings: since its debut in '91, it has placed in the top 5% of long-term bond funds rated by Morningstar every year except two. (Even then, it finished in the top quarter). And over the five years ended May 31, it ranks in the top 1% of long funds in Morningstar's universe, returning an average of 12.5% annually. Originally only an institutional fund, Loomis Sayles Bond Fund is now available to individuals through discount brokers such as Schwab.

These days, Fuss favors Asia in part because demand is so low: "The Asian market is a very thin market right now. By providing a bid at a price we like, we can buy bonds cheaply--the market is reacting to supply and demand, not just credit fundamentals.

"A year ago--even in late September--Asian bonds were carrying single-A ratings, and you were lucky to get five or 10 basis points over the comparable AA-rated, 10-year bond," Fuss recalls.

But since then, the pendulum has swung into the panic zone. "People just want out of the region completely--it's been emotional selling," says Kathleen Gaffney, who has been helping Fuss manage bond funds at Loomis for 10 years.

That's why Fuss has rebalanced his portfolio, taking money out of Latin America. "We began buying Asia in October, again in December--and we've been increasing our holdings ever since," says Gaffney. "A year ago, we may have had 15% in Latin America, 8% in Asia--now that's probably reversed," she estimates.

And even when Fuss looks at the U.S. and Europe, he stands behind his bet on Asian debt: "I'd rather own a number of strong Asian companies than strong European companies or strong U.S companies," he declares. The reason: "In Asia, valuations are reasonable--given an orderly outcome. Of course, if the whole region blows up--and we wind up minus one continent . . . forget it."

Fuss shrugs. After 40 years in the bond business, he knows that this is not a perfect world.

Nevertheless, Fuss maintains, "if a bond is selling at 77 instead of 100, it's a high credit risk, but it's a low or lower reinvestment risk"--the chance that he'll have to reinvest payments at a lower interest rate is slim. "I'd rather buy Korea at 77 cents on the dollar than Argentina at 94 cents," Fuss adds. "With the Asian bonds, the snap-back is going to be stronger--and a little safer than in Latin America. The passage of time will bring this elasticity into play sooner."

But when it comes to picking Asian companies, Fuss warns, Loomis Sayles' traditional bottoms-up approach may prove feeble. "You can have analysts running back and forth on planes--which we do. But when you get to Asia, bottoms-up doesn't do you any ding-dong at all." With a wave of his hand, Fuss dismisses whole 747s full of Wall Street analysts.

His point is that when Ivy League-educated, Wall Street-trained analysts sit down for a show-and-tell with the management of a Asian company, they might be at a cultural disadvantage. In a word, hoodwinked.

"If you want to analyze Samsung [Electronics], don't talk to its management--talk to their competition," says Fuss. "What you want is a competitor's perception of their business strength. And Texas Instruments knows a lot more about the semiconductor business than any of my analysts ever will."

After all, when Fuss buys an Asian bond, he's betting pure and simple on survival. "If they make it, you make money. Par value acts as a gravitational point--eventually they get there, if they don't go broke."

In a sense, the bond buyer is taking an equity position. "When you come to Asia, stocks and bonds begin to blend," Fuss explains. "It's as if you're buying the stock at two times non-peak earnings two years out."

Except that you're paid to wait, "so you don't have to worry as much about timing," Gaffney adds. (Fuss assumes it will take at least two years "to put Asian bonds within shouting distance of normal value.")

When he looks at Asia, Fuss admits, he's tempted by Indonesia. "It has the most potential--but I'm chicken," he confesses. He favors Thailand and Korea, and is eyeing Malaysia with interest. "I also like the Philippines," he volunteers, "but it's hard to buy things at a good price."

As for other countries: "There's nothing in Taiwan, nothing in Hong Kong, nothing in China--it's too expensive," Fuss says.

"We primarily buy Yankee bonds, which pay out in dollars, and we tend to look at banks, telecoms and utilities," Gaffney adds. "For instance, in Thailand, Bangkok Bank, Thai Farmers Bank and Siam Commercial are likely to survive--even though smaller banks may disappear."

In Korea, she points to Samsung Electronics, in the Philippines, Philippine Long Distance and Quezon Utility.

But they're not confined to corporate paper; Fuss is paying close attention to sovereign issues: "Coming down the pike, Thailand, Malaysia and Korea are going to float large issues," Gaffney notes.

But everything will depend on price. For in the end, Fuss' strategy boils down to a single piece of common sense: "When something has gone down in price, it's less risky."

The suits at Loomis Sayles don't agree. "Here they tell me, 'Don't say that to the clients. Risk is the same at every level. Don't let the children hear you say that.' " Fuss chuckles at the innocence of efficient market theory.

"I've been doing this for 40 years--they're wrong," he declares flatly, without any particular heat.

"Of course," Fuss adds, "I have an advantage. I'm an amateur. And I'm lucky."

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