By Peter Staas on May 19, 2009

With the nations housing and mortgage markets in tatters, its all too easy to dismiss any real estate-related investment as foolhardy. But this fund, which focuses on government-backed mortgage debt, has proved a safe haven in a stormy market.

During this period of unprecedented volatility, large numbers of investorsregardless of political affiliationhave thrown in their lot with the government, the most secure of traditional safe harbors.

Last year demand for US Treasuries pushed yields on these bonds to record lows as investors scurried to the perceived safety of government debt. At the same time, mutual funds that focus on government-backed mortgage debt also attracted an influx of capital. Funds that invest primarily in mortgage bonds guaranteed by the Government National Association (Ginnie Mae) saw inflows of about $6 billion in 2008, boosting the niche segments total assets to almost $55 billion according to Lipper dataa stark contrast to the massive redemptions suffered by many funds.

Although its larger siblings Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) dominate the headlines and the mortgage industry, Ginnie Maes mortgage-backed securities (MBS) are technically the only ones that carry the full faith and credit guarantee of the US government. If default or foreclosure disrupts the payment stream, the government-owned corporation steps in to ensure that bondholders avoid losses.

The federal government has yet to explicitly back debt and MBS issued by Fannie Mae and Freddie Mac, though the nationalization of the housing enterprises and repeated pledges of support strongly suggest de facto government backing.

Investors must understand that not all Ginnie Mae-focused mutual funds are created equal. Because returns generated by these funds are relatively modest, investors should be wary of those that sport higher expense ratios, which eat into returns and might prompt management to stray into more speculative fare in an effort to juice returns.

Fidelity Ginnie Mae (FGMNX) avoids both of these pitfalls, offering investors an expense ratio that clocks in below the categorys norm as well as a capable and experienced management team that hews closely to its conservative mandate. The fund normally invests 80 percent of its assets in Ginnie Mae MBS and pass-throughs, with the remainder allocated to other government-related securities or those issued by Fannie Mae and Freddie Mac.

Fund manager Bill Irving avoids betting on the future direction of interest rates, a strategy employed by many MBS managers, instead shifting asset allocations among Ginnie Mae mortgage bonds of varying coupons and cash-flow structures. For example, late last year he found value in seasoned, higher-coupon mortgage bonds, reasoning that weakness in the nations housing markets and tightening credit standards would retard prepayment speeds. That prescient move to overweight this segment has enabled the fund to collect higher interest rates for longer than the market had anticipated.

Returns have moderated somewhat as the market values of some government-related collateralized mortgage obligations and hybrid-adjustable rate mortgages have sufferedpart and parcel with a market-wide emphasis on liquidity. Institutional investors have sought to remain agile by focusing on securities that trade more readily and those with lower transaction costs. Nevertheless, these bonds continue to pay reliable yields even if their market values have dipped.

Prospective investors shouldnt allow short-term considerations to color their decision to put money into Fidelity Ginnie Mae. Although reliable income and modest returns are a welcome respite in the current downturn, investors with a longer horizon should hold the fund through bull and bear markets alike to balance out riskier, growth-oriented holdings.

FIDELITY GINNIE MAE (FGMNX)

-Federal backing of Ginnie Mae bonds

- Pays monthly distributions