Wary of Deflation
Quick Take: While many investors are expecting an economic recovery, deflation could dash those hopes, says Michael Cheah, lead manager of SunAmerica Income GNMA/A (GNMAX). A “big picture” investor, Cheah thinks investors should position themselves for a deflation economy where holding debt causes pain, and people are rewarded for doing nothing with their money as its purchasing power grows.
Stocks don’t provide a better alternative to bonds, according to Cheah, because of unresolved problems with corporate accounting. This leads him to recommend Ginnie Mae and U.S. Treasury securities. Ginnie Maes, mortgage-backed securities issued by the Government National Mortgage Association (GNMA), offer protection because they are explicitly guaranteed by the U.S. government, Cheah notes.
For the one-year period through June, Cheah’s fund rose 8.3%, versus a gain of 5.4% for its peers. For the three-year period through June, the fund gained 8.6%, on average, versus a 7.7% rise for the average mortgage-backed fund. Though it edged out its peers, the portfolio has exhibited more volatility.
The Full Interview:
S&P: What are the main features of your investment process?
CHEAH: The key is keeping it simple. My process is from the top down. I try to reduce my analysis to supply and demand. Focusing on global sectors and Federal Reserve policy differentiates me from my competitors.
I have a minimum of 80% of the fund in Ginnie Maes. The proportions of the fund in Ginnie Maes and Treasuries is a function of the yield spreads. I see the Ginnie Mae market connected to the U.S. Treasury market and Japanese government bonds.
S&P: How exactly are these market connected?
CHEAH: The Ginnie Mae market is influenced by the supply of Treasuries. With a Federal tax package, the supply of U.S. Treasury bonds could increase by $300 billion to $400 billion. To protect their currencies, many foreign central banks are buying Treasuries.
A great increase in the supply of Treasuries would raise Treasury yields and mortgage rates, which would increase the yields of Ginnie Maes.
S&P: What are the characteristics of your portfolio currently?