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Loomis Sayles Bond Retail LSBRX Still a star.

by Sarah Bush 3/6/2013

Morningstar's Take LSBRX

Even after a recent, high-profile departure, Loomis Sayles Bond has plenty to offer. Long-time comanager Kathleen Gaffney departed in October 2012 for cross-town rival Eaton Vance.
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Gaffney, who was formally named as a manager on this fund in 1997 and was a nearly three-decade veteran of Loomis Sayles, will certainly be missed. However, she leaves behind a capable and experienced team. Two-time Morningstar Fund Manager of the Year Dan Fuss remains active in the day-to-day oversight of the fund, as do Loomis Sayles veterans Elaine Stokes and Matt Eagan. The three portfolio managers are backed by a deep analyst

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bench with expertise in credit, sovereign, and currency analysis. The stability and experience of the remaining team is good news for investors who have come to love this fund's swashbuckling approach to investing in the bond markets. Indeed, the fund's credit-intensive strategy shone in 2012's risk-led markets. On its way to topping close to 90% of peers with a 15% return for the year, the portfolio got particularly strong performance out of its stake in Irish sovereign debt (3% recently) as well as positions in European corporates and bonds exposed to the housing rebound in the United States. The team's eye for value has translated in similarly strong returns over the long haul: The fund's annualized 10% 10-year gain outpaces 85% of its peers in the multisector bond category. Those heady returns haven't come without risk,
Role in Portfolio Supporting player. This fund holds appeal for income-seeking investors, but its mix of credit and currency risk courts considerable volatility, and the fund should not be viewed as a safe haven.

Fund Performance LSBRX

Year Total Return +/- Category

YTD

4.46

1.52

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though: The fund's corporate-dominated portfolio, significant non-U.S. dollar currency exposure (37% recently including a 13% allocation to the Canadian dollar), and meaningful stakes in convertibles and equities (15%) can make for a bumpy ride. Prospective investors shouldn't overlook the fund's 22% loss in 2008 and its more modest struggles in the third quarter of 2011.

2012 2011 2010

14.77 3.48 13.29

3.06 0.11 2.43

Analyst Favorites by Category LSBRX

This fund isn't for the faint of heart, but for those with the requisite patience, it's still a star. Process Pillar: Positive | Sarah Bush 03/06/2013
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YTD Return %

Loomis Sayles Bond Instl

Multisector Bond Category Average

4.67
2.91

As the flagship fund in the Loomis Sayles lineup, this fund has built a strong reputation with its corporate-heavy, often deep-value approach to investing in the bond markets. Manager Dan Fuss and his team enjoy a fair amount of flexibility: The fund can invest up to 35% of the portfolio in below-investment-grade names and another 20% in equities (with a 10% limit on common stock). The team is active outside the U.S. as well: It can invest up to 20% of the portfolio in foreign issuers, with no limit on Canadian issuers. While bottom-up credit research plays a significant role here, so do the firm's views on broad economic trends and interest rates. Not surprisingly, there's a strong contrarian bent at work here. In 2009, for example, the fund increased its stake in Ford F debt at a time when many predicted bankruptcy; in late 2011, the fund found opportunities in European corporates amid fears of a potential breakup of the eurozone. It has also invested in troubled European sovereigns, most notably Ireland (3%). Such levelheadedness when credit markets swoon help explain the fund's stellar long-term returns, although a penchant for credit and currency risk makes it vulnerable in flights to quality. Under the leadership of chief investment officer Jae Park, the team has significantly built out its tools and staff dedicated to risk management and these are integrated into the day-to-day management of the fund. The team's expectations of slow growth and low but eventually rising interest rates lie behind a sizable stake in a mix of dividend-paying equities, preferreds, and convertibles (15% recently). Manager Elaine Stokes argues that these offer good

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upside if growth picks up and rates rise. At the same time, the fund is treading carefully in high-yield bonds (19%), a sector that the team views as richly priced. Although large in absolute terms, the fund's junk stake lands near the low end of its 10-year range. Its position in dollar-denominated investment-grade domestic corporates (22%) lands near the middle of its historic range. The fund is also adventurous when it comes to currency risk: Exposure to non-U.S. and Canadian dollar denominated currency recently totaled 24%. So, while the portfolio is anchored by a 20% stake in a mix of high-quality sovereigns--Canada is a particular favorite--and other AAA debt, this portfolio's heady mix of corporate and currency exposure gives it plenty of giddy-up. The team, which historically favored long, call-protected bonds, has increasingly become more cautious when it comes to interest-rate risk. Coming out of the credit crisis, the fund dedicated close to a third of assets to bonds with maturities between 20 and 30 years; more recently this stake stood at less than 10%, while the fund's position in bonds with less than three years to maturity has risen substantially.

Performance Pillar:

Positive | Sarah Bush 02/26/2013

This portfolio's bargain-hunting, corporate-heavy strategy shines in strong credit markets. As corporate bonds rebounded sharply from the depths of the credit crisis in 2009, the fund gained an impressive 37%, thanks to its patience with struggling names such as Ford F and level-headed bargain hunting among stalwarts such as AT&T T. The fund turned in a similar, if less dramatic, performance in 2012. On its way to topping close to 90% of peers with a 15% return for the year, the portfolio benefited from its position in Irish sovereign debt (2.8%) as well as stakes in European corporates and bonds exposed to the housing rebound in the U.S. Such campaigns have helped fuel an impressive long-term record: The fund's 10% 10-year annualized return trails just a handful of funds in the multisector bond category, two of which are sibling portfolios. Those heady returns haven't come without risk, however. Hefty doses of credit risk as well as significant nondollar currency exposure--and investments in the occasional troubled sovereign--can make for a volatile ride. The fund lost 22% in

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2008's rocky credit markets, landing it behind 85% of peers; more recently, it lost 5% in the third quarter of 2011. That's not to detract from the team's exceptional record of uncovering value in the bond markets, but this fund requires patience and is best paired with a high-quality portfolio.

People Pillar:

Positive | Sarah Bush 03/06/2013

Kathleen Gaffney's October 2012 departure came as a surprise to many external observers who viewed her as long-time manager Dan Fuss' eventual successor. However, the success of this fund and the Loomis Sayles fixed-income lineup has depended on more than one or two individuals for some time, and Gaffney leaves behind a strong team. Fuss, who pioneered the fund's unique benchmark-agnostic approach, remains actively involved and has no immediate plans to retire. He works closely with Matthew Eagan and Elaine Stokes, both Loomis Sayles veterans who have comanaged this fund since 2007. A 40-person credit team, as well as dedicated sovereign and macro researchers, supports the portfolio managers. Under CIO Jae Park, Loomis Sayles has also invested significantly in the resources backing this group, including the expansion of the firm's risk-management, securitized asset research, and macroeconomic research capabilities. Park has also established a committee structure to help fuel its fixed-income teams' macroeconomic views, asset allocation, and yield curve positioning. Fuss won Morningstar's Fixed-Income Manager of the Year honors in 1995, and the whole team won in 2009 for its work here.

Parent Pillar:

Positive | Michael Herbst 09/30/2011

Legendary bond manager Dan Fuss has had an indelible impact on Loomis Sayles' investment culture. The firm, like Fuss, shows deep respect for its investment personnel. It fosters small investment teams and gives them plenty of time to hone their craft and work through rough patches. It has been loyal to a fault in a few cases, but the firm's approach generally has paid off for long-term investors in its fixed-income, large-cap value, and small-cap equity funds. Loomis Sayles, which is owned by a hands-off Natixis Global Asset Management,

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has taken steps to mitigate the impact of Fuss' eventual departure. Fixed-income CIO Jae Park has facilitated more collaboration as well as quantitative and risk-management capabilities. Such steps underscore the fact that there has been--and will continue to be--plenty of research and portfolio-management expertise beyond the firm's most-visible managers. The firm has a measured approach to expansion. It recently launched several new fixed-income strategies based on its credit and currency expertise and has incrementally grown its equity capabilities. It also aims to open its first major operation abroad in the coming years. In other areas of stewardship, like manager ownership of fund shares and fees, Loomis also gets good marks overall. Fund shareholders' capital should be well cared for here.

Price Pillar:

Positive | Sarah Bush 03/06/2013

At 63 basis points, expenses on this fund's institutional shares (59% of assets) rank as Below Average relative to similarly structured share classes; the group's median expense ratio stands at 74 basis points. Expenses on the fund's no-load, retail shares (39%) are less competitive. At 92 basis points, they are a touch higher than the 90-basis-point median expense ratio for no-load share classes.
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