Ginnie Mae Funds Offer Investors a Safe Harbor
Sunday, February 1, 2009
BOSTON -- Home foreclosures and market volatility are running high. So any investment even remotely connected to mortgages is the last place to look if you're trying to protect your retirement savings, right?
Not necessarily. Many investors seeking safe harbor and modest yield are finding both in mutual funds that specialize in buying Ginnie Maes, which are pools of mortgages guaranteed by the Government National Mortgage Association.
Ginnie Mae, which extracts fees for guaranteeing mortgage investors are repaid, is a smaller and more conservative player in the mortgage market than Fannie Mae and Freddie Mac. Those factors helped the agency avoid the troubles that ensnared its siblings and led the government to seize control of Fannie and Freddie in September.
Last year, Ginnie Maes thrived even as Fannie of the District and Freddie of McLean suffered. Nearly $6 billion flowed into about two dozen funds that invest mostly in Ginnie Maes, boosting total assets to nearly $55 billion, according to fund tracker Lipper Inc.
The niche's newfound popularity lies in its returns. They're modest -- Ginnie Mae funds collectively earned a 2008 return of 5.24 percent, according to Lipper, with the three-year average annual return at 5.07 percent. So far this year, those returns have fallen closer to 4 percent.
But that still looks pretty flashy as yields for other popular safe-harbor investments remain near record lows. Money-market funds are mostly offering less than 1 percent and provide little to no buffer against inflation. And investors still have little incentive to buy Treasury bonds after the Federal Reserve on Wednesday left its interest rate target near zero. The benchmark 10-year Treasury note is still yielding less than 3 percent and 30-year Treasuries less than 4 percent.
For investors wanting to keep their retirement nest eggs stable as they approach retirement, Ginnie Maes have looked especially good. Bear in mind that the Standard & Poor's 500-stock index lost nearly 39 percent last year while many normally safe corporate bonds were exposed as risky.
"Generally, investors get attracted to these funds after there has been a fair amount of turmoil elsewhere," said Denis Jamison, manager of ING GNMA Income (LEXNX) and a manager of Ginnie Mae funds since 1981. "Investors tend to be attracted to these funds late in the game. I can't say when the game is going to be over, but we've had a decent rally."
A rival manager, David Ballantine, has seen his eight-year-old fund, Payden GNMA (PYGNX), reach a record $455 million in assets -- more than double the amount in the fund six months ago. Ballantine expects Ginnie Maes' recently popularity will have staying power as long as the recent stream of bad economic news continues.
"We'll continue to see people want a safe haven," Ballantine said.
A few considerations for investors thinking of Ginnie Mae funds: