Why Kathleen Gaffney And Her $20 Billion Mutual Fund Prefer Tech Debt To Treasuries

NEW YORK (TheStreet) — Kathleen Gaffney, manager of the $20 billion Loomis Sayles Bond Fund(LSBRX ), prefers debt from technology companies such as Intel (INTC ) and AMD(AMD ) over Treasuries as the Federal Reserve is set to end its bond-buying program in three months.

The mutual fund, which garners three of five stars from Morningstar(MORN ), has returned 12% over the past year, better than three quarters of its Morningstar peers. During the past 10 years, the Loomis Sayles Bond Fund has risen an average of 12% annually, better than 88% of its rivals.

Welcome to TheStreet’s Fund Manager Five Spot, where America’s top mutual fund managers give their best stock picks and views on the market in a five-question format.

You aren’t expecting much of an impact on the bond market when Fed Chairman Ben Bernanke terminates QE2 — quantitative easing, part II — this summer?

Gaffney: We are seeing evidence of sustainable growth in the economy. There should not be upward pressure on interest rates, at least immediately. So I think the bond market should be in good shape.

You have about 3% of your bond portfolio in Treasuries. Why the fear over what most people consider a risk-less asset?

Gaffney: We don’t like U.S. Treasuries mainly because when you look at the yields, they are so low. There are lots of other opportunities out there in corporates and currencies, for example. There is no reason to earn a low yield when you are facing higher interest rates down the road.

About 8% of your portfolio is in convertible bonds. Why do you like converts so much?


Gaffney: We like converts because we want to be taking risk right now. There is a lot of liquidity out there. The central banks are being very accommodative so it is a good time to take risk. However, growth is modest and slow. So, typically, in a recovery you want to go down in quality. We are avoiding triple Cs. We think the right risk to take is equity upside.

More than half your fund is in corporate bonds. Which sectors and companies do you like the best?

Gaffney: We are finding good value in companies in the investment-grade and high-yield markets, but it is very issue-specific. On the convertible side, we are looking at some of the tech converts like AMD. We also like Intel, considering all the fears going on in Japan now with their supply chain. There is good value there long-term.

Do you see more risks or opportunities in the municipal-bond market?

Gaffney: We consider the municipal-bond market our very own version of what is going on in Europe. There are risks there because the states have big debt burdens. That said, the politics have not played out completely. When there is a lot of uncertainty in the budget process, there is a lot of fear in the market, and, at the right price, munis present a great opportunity for investors.

This post originally appeared at The Street.

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