Government-backed mortgages could be the next best alternative to cash, according Jeff Dutra, manager of the $830 million ING GNMA Income Fund Ticker:(LEXNX).
“Investors underserve themselves by not having enough safer investments, and most investors don't really have a decent bucket for safer investments,” he said.
Mr. Dutra believes he is providing one way for investors to keep a portion of their portfolio safe while also keeping pace with inflation.
The fund invests in pools of mortgages backed by the Government National Mortgage Association, also known as Ginnie Mae.
“Ginnie Maes fit into a portfolio as a kind of ballast,” he said. “It's been my observation that far too often, investors tend to stretch for extra yield by buying far-too-risky assets.”
Unlike the Federal National Mortgage Association, Fannie Mae, and the Federal Home Loan Corporation, Freddie Mac, which offer an implicit guarantee, Ginnie Mae provides an explicit guarantee. While Mr. Dutra said he would never recommend that an individual investor buy a Ginnie Mae pool of mortgages, he does believe in the strategy when properly diversified.
The fund holds about 400 separate mortgage pools, which represents tens of thousands of individual mortgages.
The risks, which Mr. Dutra strives to hedge by analyzing each pool in the context of macroeconomic circumstances such as the economy and unemployment levels, in an effort to predict whether the underlying mortgages will default or be prepaid.
“I use a mosaic approach, and we look at the cash flows of what makes up a mortgage,” he said. “I'll look at the average constituents of a pool of mortgage and diversify from there.”
So far this year, the fund gained 5.4%, compared with a 5.8% gain for the Barclays U.S. Bond Total Return Index. The Morningstar Inc. intermediate-government-bond category gained 5.3% over the same period.
Like other government programs that were demonized during the collapse of the housing bubble, Ginnie Mae's purpose is to expand affordable housing to consumers with lower incomes. But given the explicit government guarantees on the bonds and the rigorous due diligence during the lending process, default is less of a risk than generally is perceived.
“There's always going to be headline risks,” said J. Brent Burns, president of Asset Dedication LLC, which builds fixed-income separate accounts.
“It's not like they're ever going to completely blow up, but they're not completely bulletproof,” Mr. Burns added. “They may not track Treasuries all that well when rates start to rise.”
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