Third Quarter 2008
After several quarters of mounting concerns over the health of global financial systems, the credit crisis came to a head in the third quarter with a rapid series of events unfolding in September. These events included government-sponsored enterprises Fannie Mae and Freddie Mac being placed into conservatorship and having their dividends suspended; the bankruptcy of Lehman Brothers, which sent ripples through the money market and commercial paper markets; the announced acquisition of Merrill Lynch by Bank of America; and the collapse of AIG, one of the largest insurers in the world. Despite the efforts of the Fed and Treasury to aggressively pump liquidity into the markets and negotiate deals, this string of events drove down the value of bonds issued by financial institutions to unprecedented levels. Lower liquidity and higher uncertainty caused the prices of most other credit-related debt securities to decline rapidly as well. The flight to quality in the form of U.S. Treasuries caused yield spreads for corporate bonds to rise to historically wide levels. As a result, investment-grade corporate bonds underperformed U.S. Treasuries by almost 9% during the quarter, most of that coming in the month of September.
The Fund’s negative performance relative to the benchmark was concentrated in September and was primarily the result of an overweight to investment-grade corporate bonds and the related underweight to U.S. Treasuries. While industrial companies made up more than half of the Fund’s corporate bond exposure, the Fund did hold an overweight relative to the benchmark in the financial sector, which happened to be the worst-performing among corporate bonds. While exposure to the headline names was minimal, the Fund did hold a small position in Lehman Brothers preferred stock, which negatively impacted absolute and relative performance. While global bonds generally held up modestly better than U.S. corporate bonds, a rally in the U.S. Dollar relative to most foreign currencies weighed on the returns of the Fund’s holdings in non-U.S. bonds. With interest rates declining modestly during the period, the Fund’s longer-than-benchmark duration made a modest positive contribution to relative performance.
As we look forward, history offers few comparatives for the conditions in today’s fixed income markets. Yield spreads are at historically wide levels, market liquidity is extremely limited, and investor confidence is scarce. Loomis Sayles firmly believes that it is in these periods that buyers are offered the opportunity to make attractive long-term investments. Approximately 80% of the Portfolio is invested in corporate bonds, the area in which Loomis expects to see the most attractive investment opportunities. Financials have been especially punished, and spreads are likely to remain volatile as the credit crisis continues to ripple through the economy. Corporate bonds may offer some of the best values though, as much of the bad news appears to be factored into spreads. While duration was reduced modestly during the year, it remains approximately two years longer than the benchmark. For now, weak domestic and global economic conditions will likely take precedence over inflation concerns, keeping a lid on interest rate increases for the next several quarters. If fiscal authorities are forced to ease monetary policy, Loomis may then look to shorten duration.
Disclosure
Investors should carefully consider the fund's investment objectives, risks, charges, and expenses before investing. For this and other information, please call 800.835.3879 or download a free prospectus. Read it carefully before investing or sending money.
The performance shown represents past performance and is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. From time to time the advisor has waived fees or reimbursed expenses, which may have resulted in higher returns. The listed returns and yields on the Fund are net of expenses and the returns and yields on the indices exclude expenses. Current performance of the Fund may be lower or higher than the performance quoted.
The Fund is subject to the risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor's ability to pay its creditors.
High yield bonds (also known as “junk bonds”) are subject to additional risks such as the risk of default.
Changing interest rates may adversely affect the value of an investment. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.
Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.
Any sectors, industries, or securities discussed should not be perceived as investment recommendations. The views expressed represent the opinions of Managers Investment Group and are not intended as a forecast or guarantee of future results. Any securities discussed may no longer be held in an account’s portfolio. It should not be assumed that any of the securities transactions discussed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.
Unlike the Fund, the Index is unmanaged, is not available for investment and does not incur expenses. Please see Index Definitions for all our funds' benchmarks.
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