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 and Freddie 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 recently 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 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, Dave 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:
• NOT ALL ARE ALIKE: While it may seem funds investing in the same narrow category of government-guaranteed mortgages would yield positive returns year after year, things can go wrong. For example, Putnam U.S. Government (PGSIX) lost nearly 5 percent last year. Alongside its Ginnie Mae holdings, the fund invested in collateralized mortgage obligations whose market value sank because of their high risk compared with other mortgage-related securities. To include "GNMA" in their name, at least 80 percent of a fund's portfolio must be in Ginnie Maes. Some funds bearing "Government" but not GNMA in their name carry lesser amounts of Ginnie Maes, typically including other government securities such as bonds in mortgages backed by Fannie and Freddie. While the government's current control of those two agencies temporarily extends a virtual government guarantee, Fannie- and Freddie-backed bonds lack the explicit guarantee that Ginnie Maes have always enjoyed.
• RATE VOLATILITY: Sudden changes in mortgage rates can make Ginnie Maes complex investments. Fund managers put cash to work by sifting through the market for Ginnie Mae-backed mortgages of varying maturities, such as 30 years and 10 years, and placing bets on the pools of mortgages offering the best prospects. Success can hinge on managers' often unreliable forecasts of where rates will go.
For example, the recent rate drop has prompted a wave of refinancing among borrowers shifting to less expensive mortgages, creating "prepayment risk" for Ginnie Mae funds. When refinancing activity spikes, some of the higher-rate mortgages in Ginnie Mae funds are replaced by lower-rate mortgages, which reduces fund returns.
An opposite challenge emerges if mortgage rates rise. Then, Ginne Mae funds face "extension risk" — the prospect that market values for mortgage-backed securities bought when rates were lower will drop as investors seek higher returns from mortgages with newly increased rates.
_COSTS COUNT: With Ginnie Maes typically earning only modest returns, expenses can eat away much of it. Harry Milling, a fund analyst with Morningstar Inc., said cost should be the top consideration in comparing Ginnie Mae funds, since they're similar. "Think of these like you think about municipal bonds," Milling said. "Muni funds are kind of all investing in the same thing. What is going to make the big difference is the cost."
The top pick among Ginnie Mae funds for both Milling and Lipper fund anlayst Jeff Tjornehoj is Vanguard GNMA (VFIIX). It's by far the biggest Ginnie Mae fund with $29 billion in assets, and also has the lowest expense ratio (0.21 percent) along with a category-beating three-year average annual return of 6.09 percent.
Tornehoj advises to give slightly higher weight to a Ginnie Mae fund's performance record than its expenses. He argues the funds are sufficiently complex amid mortgage rate volatility that a savvy manager can eke out markedly better returns.
"You can certainly have a fund with low expenses that just looks to be out of place in various markets," he said.
Tornehoj advises playing it safe, since many investors rely on Ginnie Mae funds to help limit risk as they get close to retirement.
"Look at their performance next to their peers," he said. "If they're particularly volatile, that may not be the reason why you got into a Ginnie Mae fund."
Questions? E-mail the AP at investorinsight(at)