Many retail investors who scoffed at conservative government bond funds 18 months ago are the very ones who are now flooding assets into slow and steady GNMA (Ginnie Mae) funds, making them one of the best selling fund sub-sectors in the industry, according to industry executives and observers.

The funds, which are comprised of mortgage-backed securities issued by the Government National Mortgage Association, have experienced a complete turnaround in flows this year from last because of market volatility and overall investor uncertainty, executives say. As other sectors crater, investors are seeking shelter in GNMA funds from the market fallout.

Because pure GNMA funds invest exclusively in highly rated mortgage-backed securities issued by the government, they are considered by many investors and advisors to be extremely safe investments that provide a better yield than money market funds or Treasury bonds, said Whitney Dow, an analyst with Financial Research Corporation, of Boston.

Not surprisingly, the funds' popularity has increased dramatically in recent months and recent flows into GNMA funds indicate the funds are rebounding from historically weak sales. From 1998 to 2000, GNMA funds lost an average of $1.13 billion in net flows, according to FRC data. However, for the first half of this year, net flows into GNMA funds have totaled $4.8 billion. That's about 5% of the fund industry's total net flows for the year, Dow said.

The market environment and strong sales encouraged fixed-income giant PIMCO to offer its GNMA fund to retail investors. Although the funds have not traditionally been popular with retail investors, PIMCO attached retail shares to attract investors who want an almost guaranteed rate of return, said Steve Gleeson, an account manager with PIMCO.

Ironically, the new flows into GNMA funds are coming from performance-chasing investors who were happily riding the Nasdaq bandwagon just a few short months ago and who are now looking for any kind of return they can find, Gleeson said.

"The whole world has changed. That's why we opened up the retail side of the fund," he said.

And there have been other indications that GNMA funds are becoming more attractive investments for retail investors. Early last month Payden & Rygel, an asset manager based in Los Angeles, announced that its GNMA fund was added to Schwab's Marketplace platform in June.

The GNMA fund has recently become one of Payden's most popular funds, said Karen Jacquart, Payden's director of financial advisor services. "The fund has grown about 30% since the beginning of the year and most of that money is retail money," she said.

Payden has taken the extra step of targeting retail investors with its GNMA fund with television advertisements which appear twice daily on CNBC, she said.

Demand for Payden's fund has exceeded expectations and all of the GNMA funds that Schwab sells have been attracting strong asset flows, largely because they invest in high- quality bonds, produce a good yield and consistent dividend and they have a stable NAV, said Mo Shafroth, a Schwab spokesman.

Schwab currently sells GNMA funds offered by Vanguard, Federated Investors and American Century.

Another confirmation of GNMA funds' growing popularity is the Vanguard Group's GNMA Fund. That fund was one of the top-selling funds in July, garnering $16.8 million in net flows making it the eighth best selling fund year to date, according to FRC data.

Driving much of the growth in GNMA funds is the drop in short-term interest rates, said Christopher Carosa, president of Carosa, Stanton & DePalo Asset Management, a financial advisor in Honeoye Falls, N.Y.

GNMA funds are producing an attractive yield because they are locked in at higher interest rates, he said. But if interest rates are reduced much further, many homeowners could seek to refinance their mortgages, bringing GNMA yields more in line with current interest rates, he said.

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