Investors have flocked to bond funds over the past few years, seeking reliable income and protection from volatile equity markets. However, these same investors have been willing to take on greater levels of risk by investing in lower-rated bonds while demanding smaller payouts. If an investor is willing to take such an aggressive stance, they should at least invest with a management team with a pedigree of success.—The Editors

Dan Fuss, lead manager of Loomis Sayles Bond (LSBRX), is a man of conviction and his team follows his lead. Those convictions have generated sizable payoffs over the years, but they’ve also caused shareholders pain.

The fund’s net asset value was battered in the late 1990s when Fuss and his team held low-rated corporate debt and emerging-market bonds amid a raging default crisis in Russia. A few years later the fund maintained its positions in telecom- and Internet-related bonds as the dot-com bubble burst. And in 2008 Fuss held corporate bonds and non-dollar denominated debt while the market favored Treasuries.

Needless to say, the fund generates its fair share of volatility.

Despite these missteps, Loomis Sayles Bond remains one of the top-performing multi-sector bond funds on the market. The fund ranks in the top 25 percent of multi-sector funds for the trailing one-year period and the top 18 percent for the trailing five years. Management has made some wise moves over the years, notably heavy bets on Ford Motor (NYSE: F) and homebuilders in 2009.

That willingness to take risks and stick with them as long as the fundamentals bear them out has earned Fuss a reputation as one of the industry’s most successful fixed-income investors.

But 2008 was a brutal year for all asset classes aside from Treasuries, and corporate bonds–Fuss’s stomping grounds–suffered the brunt of the pummeling. With less than half of its portfolio allocated to investment-grade issues and almost 20 percent in high-yield issues, the damage was especially painful. Last year the fund’s portfolio held a sizable portion of non-dollar denominated assets just as investors sought shelter in the greenback.

Loomis Sayles Bond held strong in the early stages of the Great Recession, generating an 8.3 percent return in 2007. But the fund nosedived more than 22 percent in 2008, slipping close to the bottom of its category. In this case, Loomis Sayles Bond fell victim to bad timing. Management in 2007 added positions in Treasury bonds–an uncharacteristic move for the fund–only to unwind that overweight position just before the Treasuries boom took hold.

Unlike other fund managers, Fuss has eschewed mortgage-related debt, particularly debt issued by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). He’s also built a cash position of more than 6 percent of investable assets.

In a characteristic move, he’s bet that worries over Europe’s sovereign debt crisis are overblown and has staked out a 2 percent position in Irish sovereign debt. Fuss also employs a value-sensitive approach to investing in corporate debt, seeking to invest in strong companies with a growing market share and low capital costs.

Occasionally management will also establish positions in troubled companies that have fallen out of favor. More often than not, these gambles pay off for investors.