Are GNMAs Right for You in Today’s Environment?

You’re probably familiar with GNMAs, but how do you know if they’re a good investment?

The Government National Mortgage Association (GNMA) packages together mortgages and issues bonds (in denominations of $25,000) based on those mortgages. Investors in GNMAs are paid monthly distributions representing interest payments and principal repayments on those mortgages.

Many investors have a hard time scraping together $25,000, so they usually purchase shares of a mutual fund that invests in GNMAs.

GNMAs are backed by the full faith and credit of the U.S. government, meaning they come with a guarantee that covers timely principal and interest payments of the loans underlying the securities. But the price of the securities will still rise and fall. So how do you know if GNMAs are good investments?

The major price fluctuations of GNMAs are due to the risk of homeowners paying their mortgages early. And you can get an idea of how many homeowners will do that by looking at the economic environment.

When interest rates decline, GNMA funds may perform poorly because people with mortgages usually refinance at lower rates. As they do so, more money is returned to the GNMA pool, and GNMA fund managers are forced to reinvest that money at prevailing lower interest rates.

When interest rates rise, GNMA funds may also perform poorly. GNMA funds hold a portfolio of mortgages purchased at lower interest rates, and people who took out those mortgages have no incentive to refinance them because interest rates are higher.

So, when do GNMAs tend to perform well? In any other environment (specifically, when interest rates are stable or rising only modestly).

If you would like to consider GNMAs for your portfolio, it might be worth a conversation with us. We can point you in the right direction given your individual financial circumstances and goals. Call or email us today.

Assessing the Performance of Your Portfolio

When markets are down, it’s easy to think your mutual fund is underperforming. But assigning a term like “underperforming” to a fund must take many factors into account.

First, should you be in the fund in the first place? A fund that has returned 10% over a certain period may seem “better” than a fund that has returned 3% over the same period, but the better-performing fund may have earned those higher returns by taking on risk that you can’t tolerate.

Second, how is the fund performing relative to other funds in its peer group? Different asset classes can be expected to perform differently because they have different risks. Even the performance of securities in the same asset class can vary. For example, government bond funds perform differently from corporate bond funds.

Third, how is the fund performing relative to its benchmark? Every mutual fund has a legal mandate that limits its investment options. For example, if a stock fund’s mandate is to invest 80% of its portfolio in stocks, portfolio managers cannot move more than 20% of assets to bonds or cash, even in a bear market. Because of this, the standard for measuring mutual fund performance is not positive returns but an appropriate index.

These factors are particularly important to remember after a decade in which double-digit annual returns were the norm because today’s investors tend to have unrealistic expectations.

Do you need help assessing the performance of your portfolio? We can review your portfolio and make suggestions. We’re just a call or email away, and we’re always here to assist.