"GNMA isn't a mortgage lender in the traditional sense; it's doesn't underwrite, buy or sell loans. It simply guarantees payment on mortgage-backed securities (MBS) made up of loans made or insured by other federal agencies such as the Federal Housing Administration.

"And, backed by the federal government, GNMA-insured MBS carry little more credit risk than Treasuries, though they offer significantly higher yields.

"Since manager William Irving took the helm in 2004, the fund has consistently ranked in the top third of its intermediate government category and has generated a three-year annualized return of 6.7%.

"Instead of focusing on future movements in interest rates, Irving takes more of a value approach.

"The market for GNMAs tends to less liquid than other types of MBS, which Irving exploits by reallocating assets among GNMAs' various coupon and cash-low structures, which appear to have fallen out of favor.

"Believing that weakness in the housing market and tightening credit standards would slow prepayment speeds in low interest rate environments, late last year he found value in seasoned, higher-coupon mortgage bonds.

"That move to overweight this segment has enabled the fund to collect higher interest rates for longer than the market had anticipated.

"The fund's mandate also allows up to 20% of assets to be invested in other non-agency MBS, namely those issued by Fannie Mae and Freddie Mac, which Irving has only recently begun dipping into in any volume.

"Now that Fannie and Freddie have essentially been nationalized, the broad assumption is that the federal government is essentially backing MBS issued by the two. That's given Irving the confidence to add to those holdings, increasing the funds' yield slightly.

"Returns on GNMAs have dropped a bit in recent months as institutional investors have focused on more liquid securities. But that's of little concern for our purposes. The fund offers a yield of almost 5% and low volatility.

"With an attractive yield and the explicit backing of the federal government on more than 80% of its assets, Fidelity Ginnie Mae is a new addition to our model fund portfolio."

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