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Ginnie Maes Look More Attractive |
By TIM PARADIS
The Associated Press
Tuesday, October 17, 2006
NEW YORK -- If the Federal Reserve does as expected and leaves short-term interest rates unchanged next week, investors looking for a conservative income mutual fund might consider those that invest in Ginnie Maes. Some fund managers believe these government-backed mortgages can perform well in a stable interest rate environment.
Denis Jamison has been managing the same Ginnie Mae fund for nearly 25 years _ almost as long as many people take to pay off their home mortgages. Having shepherded the ING GNMA Income fund through a variety of market conditions, he sees the present environment as ideal for investors looking for a steady income stream to invest in mortgage funds.
"The real attraction for any mortgage security is income," Jamison said. "I think they're most suitable for people getting a little closer to retirement."
Ginnie Maes tend to pay less interest than other types of mortgage-backed securities because their principal and interest payments are guaranteed by the government. The Government National Mortgage Association works by packaging mortgages from agencies such as the Department of Housing and Urban Development or the Department of Veterans Affairs.
Mortgage funds are worth examining, Jamison said, because the underlying mortgages prices are generally at or below par, or face value, giving a fund's principal room to appreciate. Also, the coupon, or interest rate, on these mortgage securities is about 100 basis points higher than the yield on a benchmark 10-year treasury note before inflation. Ginnie Maes tend to be less sensitive to interest rates than are the 10-year Treasuries, he notes.
"You can't really compare these to high-yield and junk bonds or even corporate bonds. There's a lot of risk that you don't face with mortgages that you do face with other fixed-income securities," Jamison said.
Ginnie Mae funds are getting another look now that the Fed, which raised interest rates 17 times over two years, left rates unchanged at its last two meetings. It meets again starting Oct. 24.
The ING GNMA Income fund's three-year return is 3.31 percent. Morningstar, which rates funds, describes it as "outstanding" for long-term returns but notes that its expense ratio of 0.98 percent is high. Morningstar sees the Franklin U.S. Government Securities fund as another noteworthy player in the Ginnie Mae arena because of its lower fees. However, Morningstar gives the Franklin Fund, whose three-year return is 3.41 percent, a lower overall rating than the ING fund.
One risk investors can take with mortgage bonds is the chance that the borrower will repay all the money and wipe out the lender's interest returns.
But, "right now because of the prices, prepayment risk is not a worry," Jamison said.
Matt Hastings, lead portfolio manager for taxable bond funds at Charles Schwab Investment Management, contends that Ginnie Maes appear "a bit more on the rich side" than other mortgage sectors but he sees the investments as perhaps smart for investors looking to add to the conservative portion of their portfolio.
"In a range-bound environment, it would be expected to outperform a comparable government-based mutual fund," Hastings said. "Mortgages typically offer a better yield and total return profile than investing in straight treasuries."
He notes that "big whipsaw movements" in interest rates can cause mortgages to suffer.
Hastings helps manage a Ginnie Mae fund at Schwab whose three-year return is 3.33 percent and which is well regarded by Morningstar. He said Ginnie Maes are one of a few types of investments that those nearing retirement might consider, though he notes that as people live longer, investors frequently need to keep building capital in their portfolio.
Norm Mindel, an executive vice president and financial adviser at Genworth Financial Advisors Corp., said many investors, particularly those nearing retirement, are too focused on yields from dividends on interest rates rather than how much their portfolios will yield as a whole. He counsels clients to invest in bonds or bond funds focused on maturities of five years or less because of interest rate risk faced by longer-term investments.
As a result, he's skeptical of mortgage-backed securities because their maturities are generally longer than five years. With a fund, of course, investors can more easily cash out than if they held the bonds outright.
He encourages investors to invest in funds focused on bonds with maturities of one to three years. "The volatility of interest rates can be as volatile as the stock market," he said.
© Copyright 1996- 2006 The Washington Post Company
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