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Weekend Investor
Aug. 13, 2010, 7:20 p.m. EDT · Recommend (4) · Post:
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Dynegy deal marries cheap money, depressed assets
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) -- Mortgage rates are sliding, with the 30-year fixed-rate loan at its lowest level in almost 40 years. That's good news for home buyers and homeowners, but not for yield-oriented investors.
Lower lending rates are particularly hard on shareholders of mutual funds and exchange-traded funds that ply the giant and unpredictable mortgage market. Yet the best of these specialized funds should be able to cherry-pick attractive mortgage-backed securities and ride out this tough rate environment.
MarketWatch's Alistair Barr explains how a replacement for Fannie Mae and Freddie Mac might work and what's at stake, including the value of your home.
"Mortgage funds will tend to do better over longer periods of time or during periods of relative stability because the excess yield will help to drive returns," said Scott Buchta, head of investment strategy at institutional brokerage Braver Stern Securities.
Manager experience counts, especially with the U.S. government's actions to loosen credit and spur lending. The Federal Reserve's decision this week to invest proceeds from its mortgage-backed securities portfolio into Treasurys helped send yields on some shorter-term Treasurys to new depths.
Moreover, lawmakers are debating changes to government-owned enterprises Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.38, -0.01, -1.37%) and Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.40, 0.00, 0.00%) , the nation's biggest issuers of mortgage-backed securities, that could slam a door on mortgage-fund shareholders. Read Special Report on legislative battle for Fannie, Freddie.
Mortgage-backed securities funds have gained about 6% on average so far this year, though they've underperformed Treasury funds for the past several weeks, according to fund-tracker Lipper Inc.
Mutual-fund selling could continue, particularly if low rates spur refinancing and if a Fannie and Freddie remodeling includes debt forgiveness -- as some observers fear. That prospect alone is enough to cast a long shadow over MBS funds. Read more on what would happen to mortgage rates if Fannie, Freddie disappear.
Yet mortgage experts say income-seeking fund investors should look beyond these short-term headwinds even if they pick up strength. MBS funds boast higher yields than comparable Treasurys and much of the income comes with federal government support. Read Bond Report for more on record Treasury yields.
Said Buchta: "Find a manager who's been through cycles."
With that in mind, here are five MBS mutual funds and exchange-traded funds to consider:
1. DoubleLine Total Return Bond
After a storied run at asset-management giant TCW, veteran bond-fund manager Jeffrey Gundlach and partner Philip Barach, along with much of their research team, left their duties at TCW Total Return Fund /quotes/comstock/10r!tglmx (TGLMX 10.26, +0.01, +0.10%) late last year and opened their own firm, DoubleLine Capital.
DoubleLine Total Return Bond Fund /quotes/comstock/10r!dltnx (DLTNX 10.87, +0.02, +0.18%) came to market in April and so far has rewarded early adopters, up 11% since the launch. The outsized return is indicative of Gundlach's boldness. Unlike most of its rivals, which lean to pools of top-rated mortgages backed by government agencies Ginnie Mae, Fannie Mae and Freddie Mac, the DoubleLine fund adds a thick layer of low-ranked non-agency MBS.
About 55% of the portfolio, Gundlach said, is in these riskier plays, including subprime and so-called Alt-A mortgages, which are more illiquid than government-backed debt. As a result, the non-agency MBS portion presents significantly higher income potential: the Total Return portfolio sported a hefty 12% yield at the end of July.
Offsetting the exposure to less-predictable non-agency debt is a sizeable stake in more traditional agency collateralized mortgage obligations and agency pass-throughs. CMOs display qualities of bonds and pass-throughs, but their cash flow and stability is more varied and complex than basic pass-throughs. The DoubleLine fund is particularly focused on longer-dated agency-backed securities.
"We're buying ones that are locked out for several years," Gundlach said. That way, he added, "we get yields that are higher than any Treasury and don't have to worry about near-term change in [government] policy."
Meanwhile, the non-agency MBS universe, Gundlach said, has powerful technical drivers. "There's no supply," he said. "It's the highest-yielding market and its supply/demand condition is powerfully favorable and very unlikely to change anytime soon."
Yet Gundlach and his team are known for being able to handle risk. "This fund is better equipped than most to navigate the challenges," wrote Sonya Morris, an analyst at investment researcher Morningstar Inc., in a recent research report. Still, she added, "Investors shouldn't be surprised if it encounters bumps along the way."
The nearly $5 billion Dynegy deal has several moving parts that could set off early warning lights of things to come -- including the possibility that the leveraged buyout is about to make a big comeback.
3:51 p.m. Aug. 13, 2010 | Comments: 2
- redpine | 9:40 p.m. Aug. 13, 2010
"Illinois bank closed by regulators; tally of U.S. bank failures for 2010 now at 110 http://on.mktw.net/9kzCLP" 7:26 p.m. EDT, Aug. 13, 2010 from MarketWatch
"U.S. stocks fall for fourth day to cap weekly loss of nearly 4% http://on.mktw.net/9cS8m4" 3:02 p.m. EDT, Aug. 13, 2010 from MarketWatch
"Kansas City Fed's Hoenig: Current Fed monetary policy a 'dangerous gamble' http://on.mktw.net/dqvHRk" 10:34 a.m. EDT, Aug. 13, 2010 from MarketWatch
"Dynegy shares surge 60%, reflecting premium in Blackstone deal http://on.mktw.net/aSsZgm" 10:14 a.m. EDT, Aug. 13, 2010 from MarketWatch
"U.S. consumer confidence edging up in August; report buttresses stocks http://on.mktw.net/aWLxv6" 9:00 a.m. EDT, Aug. 13, 2010 from MarketWatch
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