Mortgage-Backed Securities Ride Strong Housing Market
Guy Halverson writer of The Christian Science Monitor, The Christian Science Monitor
Call it a vote for the stability of the US housing sector or a protest against the troubled US stock market. Either way, investors continue to pour money into bond funds, especially those that hold government-backed mortgage securities.
For the week ending Aug. 21 alone, inflows to taxable bond funds hit $1.4 billion, with more than half that amount going to mortgage- backed funds, according to AMG Data Services, which tracks mutual- fund flows. For the year, more than $16 billion has flowed into mortgage-backed funds.
In terms of gains, funds that specialize in mortgage-backed securities, especially Ginnie Mae funds, have been among the high achievers for 2002, and there is no indication of a major dropoff for the remainder of the year.
Yet, many investors find these funds somehow confusing or stodgy.
Brandishing individual securities issued by US mortgage agencies popularly known as Ginnie Mae, Fannie Mae, and Freddie Mac, mortgage- backed-securities funds are among the safest or, at the least, durable, of all fixed-income funds.
The top 25 mortgage-backed bond funds have posted average gains of about 6 percent for the year through Aug. 27, according to analysis by information firm Morningstar Inc., in Chicago. (See chart, below.) Compare that with the Standard & Poor's 500 Index, which is down some 17 percent, or the loss of some 11 percent in the Dow Jones Industrial Average.
And while the biggest mutual-fund gainers of 2002 have begun to show signs of slippage - real estate funds (REITs) and gold funds, for example - mortgage-backed bond funds continue to eke out modest but clear gains.
No summer slide
"We were quite surprised at how well the funds did in July and August," says David Ballantine, managing director of Payden & Rygel, a mutual-fund company in Los Angeles. Payden & Rygel's GNMA Fund, with assets of about $135 million, is up about 7 percent so far this year.
"We had thought that there would be some dropoff in the summer," Mr. Ballantine says, "but that hasn't happened."
Mortgage-backed funds invest in securities sold by the key US housing agencies. The agency best known as Ginnie Mae, for example (from the acronym GNMA, for Government National Mortgage Association), is a government corporation that provides liquidity for low- and moderate-income and first-time homeowners. Fannie Mae and Freddie Mac are other government-sponsored homeowner programs.
These quasi-governmental agencies buy individual mortgages from banks and other lenders and then package them as investment pools. Mutual-fund companies then create funds that invest in these pools. …