Fund Profile: USAA GNMA Trust

By Ann C. Logue, MutualsAdvisor.com | Feb 10, 2008 | comment

Although the economy is obsessed with mortgage problems, only a few mortgages actually have problems.  In most cases, the trouble sits with floating rate mortgages with low introductory rates written on most or all of the value of the property.  When the introductory period expires, interest rates go up, and property values go down, this type of mortgage can quickly move beyond the willingness or ability of the borrower to meet the payments.

Most mortgages are perfectly fine.  They are for 90% or less of the property value, the rates are fixed, and the borrowers are rational people who took out only as much as they could afford to pay.  Every month, they pay off more principal and interest, so every month, the holders of their mortgages receive a steady payment.  Because these mortgages are so stable, they usually qualify for insurance by the Government National Mortgage Association, also known as GNMA or Ginnie Mae.  If a borrower defaults on a GNMA-conforming loan, GNMA will reimburse the investor for the amount. Hence, bundles of GNMA-conforming mortgages are among the highest-quality mortgage backed securities.

 In addition to being a quality play in a troubled market, GNMA certificates, like all bonds, go up in value as interest rates fall.  Lower market rates make their interest payments relatively more valuable, and the Federal Reserve Bank has been busy cutting rates.  It’s possible that rates would fall so low that borrowers would refinance their mortgages, meaning that investors would receive their principal but not the anticipated interest.  Even if borrowers don’t refinance, the average American homeowner moves every eight or nine years or so.  Each move involves paying off one mortgage to get a new one on the new house.  Because of this, even GNMA certificates on 30-year-mortgages should be thought of as intermediate-term securities.

Fixed-income investors are fond of GNMA certificates because they generally offer higher interest than Treasury bonds and still have principal backed by the U.S. government.  Even with the mortgage market in general under pressure, GNMAs are holding up in value, to the benefit of shareholders in USAA GNMA Trust.  Since the turn of this century, the fund has beaten the average government securities fund.  In 2007, for example, the fund returned 6.29% while the average fund in the category was up 6.09%.  Its average annual return for the last five years is 3.72%, better than the category average of 3.27%.

This fund was formed in 1991 and has posted positive performance in 14 out of its 16 years of existence.  The manager is Margaret Weinblatt, CFA, who joined USAA in 2000 and took over the fund in 2002.  She earned a Ph.D. in finance and worked for several different investment companies before arriving at USAA.

This fund is cheap to buy and operate.  Because USAA is structured as a membership organization rather than as a for-profit corporation, there is a little less interest in maximizing fee income than with some of the firm’s competitors.  That’s important in the fixed-income market because annual percentage returns are rarely large enough to accommodate a high fee structure and still generate competitive performance.  The USAA GNMA Trust has no load and no 12b-1 fee.  With a management fee of just 0.13% and other expenses of 0.35%, the fund has a total expense ratio of 0.48%, significantly below the category average of 1.08%.

There’s just one catch: USAA mutual funds can only be purchased by USAA members, which include current, reserve, and retired service members and their children.  If you evaded the draft but your father didn’t, you may be able to join under his membership.  Of course, the no-fee membership includes access to low-cost auto and homeowners insurance, banking, financial planning, and mutual funds.  Non-members can also buy shares through some online brokerage firms, but they can’t get the discount car insurance.

USAA members who need fixed-income options might want to think about this fund.  It offers great performance in a sector of the fixed-income market that is relatively unaffected by the current mortgage crisis but that pays better interest than Treasuries.  In fact, the slow real estate market reduces the repayment risk that can make mortgage-back securities volatile. Hence, it’s a good fund at a good time.

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