Government-backed funds put security blanket under IRA kitty
Whether planned or not, mutual funds that put shareholders into government securities have become the hot item for IRAs this year. ``Right now, this is the biggest IRA market of all,'' says Reg Green, editor of Mutual Fund News Service. ``There has been an absolute explosion in these funds.''
They offer IRA investors, for the time being anyway, the best of both worlds: high return and a very comfortable level of safety. The funds invest largely in certificates issued by the Government National Mortgage Association (``Ginnie Maes'') and US Treasury securities. That means these funds offer the comfort of being backed by the US government, and they carry unusually high yields, in the mid and high 12 percent range.
Ginnie Maes, for example, currently return about 12.9 percent. When a low 4 percent rate of inflation comes out, these securities tuck away a real return of close to 9 percent. ``That's the highest real return in 15 years,'' observes Mr. Green.
That fact has not gone unnoticed by mutual fund investors, particularly those with IRA money in search of a home. The tax- advantaged status of a retirement account sweetens the yield that much more.
American Capital Group opened its American Capital Government Securities Fund last July and in six months took it over the $1 billion mark. The fund currently counts just over $1.2 billion in assets with some 25 percent of the accounts from IRAs.
The fund's charter allows it to invest in all types of government securities, says spokeswoman Sheila Turner, but the concentration to date has been Treasuries. ``We are allowed to go into Ginnie Maes but never have, simply because you can't write options on Ginnie Maes. . . . We are attempting to return 1- to- 1.5 points above the Treasury [bond] rate. We do that by investing in Treasuries and then writing covered put and covered call options.''
The option writing end of it gives the yield an extra boost, over Treasury bonds, and hedges the fund against interest rate fluctuations.
The Colonial Government Securities Plus Trust, follows a similar strategy, with the exception of a 30 percent investment in Ginnie Maes, and has raised $900 million since opening February 1984, says Art MacPherson, vice-president of Colonial Investment Services Inc., in Boston.
The fund concentrates on optionable Treasury securities (not all Treasury securities can be optioned) and currently returns about 13 percent. It also uses interest rate futures to lower volatility when the bond market ticks downward. ``This is a conservative fund,'' cautions Mr. MacPherson. ``We use options and futures for risk management. This is not a speculative fund.''
Although IRA investors have nine Colonial funds to choose among, some 60 percent have beat a path to Government Securities Plus Trust.
``The spreads between the Treasury returns and inflation is close to an all-time high. You look around at what's competitive and you can't get higher return with less risk. But you can get a lower return with more risk,'' says Mr. MacPherson.
Franklin Resource's Custodian Fund invests primarily in Ginnie Maes because of higher rates. They currently yield about 13 percent, says fund manager Jack Lemein, compared with under 12 percent for 30-year government bonds. ``The spread over 10-year Treasuries is even greater,'' he says.
Although the Ginnie Mae is a long-term security, it acts short term since it represents home mortgages that are often paid off in five years when the home is sold, says Mr. Lemein. That lets the fund bring in higher, long-term interest rates without worrying about fickle bond prices.
The bottom line for Ginnie Maes is long-term rates covering what are virtually short-term maturities.
``Ginnie Maes have a very high yield for the type of quality,'' says Mr. Lemein.
A mutual fund is probably the only way for a small investor to buy into Ginnie Maes. If an investor wants to buy the certificates directly, there is usually a $25,000 minimum investment and a mettlesome tangle of paper work. The mutual fund takes care of that.
About 25 percent of the $3 billion Custodian Fund's accounts come from IRAs.
Similarly, the Vanguard family of funds has seen a three-fold increase in IRA business over last year largely, says a spokesman, due to the addition of a Ginnie Mae portfolio.