Few fixed-income funds deliver consistent returns regardless of what the bond markets may be doing; until last year, Loomis Sayles Bond (LSBRX) was one of a handful that could claim that honor.

Since the beginning of the decade, the fund had failed to generate positive results in only three quarters–that is, until last year and the massacre now known as the Great Recession. And the fund didn’t just eke out positive returns; it consistently outperformed 85 percent of its peers or better.

Not surprisingly, a cult of personality sprang up around manager Daniel Fuss, who developed a deserved reputation as one of the most successful fixed-income managers outside of PIMCO.

But 2008 was a brutal year for all asset classes aside from Treasuries, and corporate bonds, Fuss’ favorite stomping ground, caught the brunt of the pummeling. Fuss was particularly vulnerable, with less than half of the portfolio in investment-grade issues and almost 20 percent in high-yield issues. The fund also maintained a sizeable position in non-dollar denominated assets last year, just as investors began flocking to the security of the greenback.

Despite riding out a tough 2007, when the fund generated an 8.3 percent return to move into the top 12 percent of its category, the fund nosedived more than 22 percent in 2008, slipping to almost the bottom of its category. The irony is that in 2007 Fuss and his co-managers built up positions in Treasury bonds–an extremely unusual move–only to unwind them just before the Treasuries market boomed.

Those missteps prompted many investors to wonder if Fuss might have lost his touch.

That doesn’t appear to be the case. The fund is well positioned to ride out the reminder of the storm since Fuss moved to reduce the duration and increase the credit quality of its portfolio. And with Fuss’ half century of fixed-income experience and strong supporting cast, it’s not time to abandon the fund; Fuss has a history of coming back strong after tough years.

Fuss has always favored strong companies with good-to-growing market shares and low capital costs and hasn’t been afraid to make bets on troubled companies that he believes will ultimately recover. His acumen in those areas of the market borders on the uncanny and should ultimately pay off for investors who stick around.

Still, interested investors should carefully consider their risk tolerance before buying into the fund. Despite Fuss’ ability, some of his bets do move against him, as they did in 2000. That year the fund invested heavily in high-yield debt, but defaults spiked and investors shied away from risky names. Although the fund still managed to gain 2.9 percent that year, it was a rollercoaster ride from start to finish.

This fearless contrarian investing makes the fund most appropriate for younger investors; to realize the full benefit of management’s bond-market savvy, investors should be long-term holders with a fair risk tolerance. In short, this fund should reward any investor who can afford to hold out in choppy markets.

WHY TO BUY
LOOMIS SAYLES BOND (LSBRX, $11.71)
. Manager Dan Fuss has proven his ability to bounce back from tough years
. Taking portfolio in a more conservative direction