Q:  What is the objective of the GNMA fund? A : The fund seeks current income as the primary objective, with capital appreciation as the secondary objective. Its principle investment technique is active trading of mortgage-backed securities issued or guaranteed by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”) without regard to the maturity of these securities. Under normal circumstances, the Fund invests at least 80% of its net assets in these securities and may also invest in other U.S. government securities. Q:  What is most important to you about Ginnie Mae bonds? A : Even though securities issued by GNMA are similar in nature to the ones issued by Fannie Mae and Freddie Mac, the basic difference is in the level ofsupport by the U.S. government. Ginnie Mae’s are backed by the full faith and credit of the U.S. government. Bonds that are issued by Fannie Mae and Freddie Mac offer only implied support from the U.S. government, not assurance of financial support. Both Fannie and Freddie are operated and managed as private corporations. The Ginnie Mae is a U.S. government-owned corporation within the Department of Housing and Urban Development. Ginnie Mae backed securities are the only mortgage-based securities explicitly backed by the full faith and credit of the U.S. government. Q:  Why do you prefer Ginnie Mae mortgage-backed securities over U.S. Treasuries? A : I like the bundling of mortgages pooled under the guidelines laid by Ginnie Mae. The agency buys mortgages from the market and bundles them all into a trust fund. We can then offer investors in this fund a slice of the payment whenever the homeowners make their monthly mortgage payment. This is basically a cash flow through process. We prefer these bonds because we get 100 basis points to 150 basis points more interest than U.S. Treasuries. These mortgages can typically be more volatile than U.S. Treasuries but the risk-reward ratio is generally very favorable to investors beyond the short-term. Q:  Would you elaborate on this preference in more detail? A : When interest rates decline, we, as bond investors, are happy with the increase in value of the mortgage-backed securities that we have bought. However, if interest rates drop significantly, it could trigger a mortgage refinancing process. This would mean that the mortgage-backed securities we have purchased would be called away and replaced by a full cash payment. Should this happen, we try to minimize the refinancing risk by moving towards mortgage-backed securities with lower rates. It is overall a dynamic process. Q:  What makes Ginnie Mae different from Fannie Mae and Freddie Mac? A : Ginnie Mae was carved from the Federal National Mortgage Association in 1968 and it provides a platform to pre-approved lenders to issue bonds that conform to standards that are laid out by the agency. These bonds are then sold to investors who are guaranteed full and timely payment of principal and interest by the agency. This guarantee is backed by the full faith and credit of the U.S. government. The securitization market developed because Ginnie Mae offered the certification and the explicit guarantee. The development of the market lenders made it possible to increase loans made available for mortgages. Fannie Mae and Freddie Mac have been run for sometime as private entities and they also trade on the New York Stock Exchange. In recent years, Fannie and Freddie overextended their loan portfolio and increased their leverage to very high levels. Q:  Would you describe your process of security selection? A : My process begins with a study of macro indicators. If I perceive a rise in inflation and thus rising interest rates, I will generally underweight GNMA holdings and build up a cash cushion. In contrast, if I foresee declining interest rates, I will evaluate my options to invest in either GNMA or treasuries. If spreads are wide enough, I typically view GNMAs as attractive investments and well worth their prepayment risk. Finally, I generally select coupon rates based on how fast I think interest rates will decline. Higher coupons offer potentially more attractive yields but come with increased prepayment risk. The opposite is true for lower coupons. Q:  Once you have decided about your view on the interest rate and its rate of change, how do you choose from the universe of bonds that meet your requirements? A : If treasuries meet the requirements, then all that matters is the bond duration. As long as I am bullish, I would have a bias toward higher duration securities. Then I look at the coupon to determine if it is worth paying a premium. I generally do not pay up for the premium based on vintage or geographic location of the security because I figure the market typically adjusts for these special factors. Q:  In general, how many holdings do you have in the fund? A :We generally have between 200 and 300 holdings in our portfolio. Q:  What would the general coupon range be in the majority of these 200+ holdings? A : Currently about 4.5% to 5.5%. Q:  Do you follow any benchmark? A : Yes, we follow the Citigroup GNMA Mortgage Index and the Bank of America/Merrill Lynch Mortgage Index. Q:  How do you create Alpha over the benchmark? (Alpha is the excess return of the fund relative to the return of the benchmark index.) A : In short, I typically build up a bigger cash position in a rising interest rate environment. In contrast, I generally invest more in lower-coupon GNMAs in a falling interest rate environment. Obviously there is more to my decision-making process, which is very technical. In either scenario, I consider the direction and volatility of the market, changes in yield curves, and bond quality or ratings as well as their coupons. Q:  When you make a decision about the interest rate and buy your holdings, how do you react when you find that your decision was wrong? A : As part of the process, we have frequent investment policy committee review meetings in addition to continued monitoring and evaluation. We reposition the portfolio as necessary. Q:  What risks do you focus on and how do you control them? A : The one risk that we feel very strongly about is the loss of capital because it would be very difficult to recover. Consider a hypothetical investment in which you lose 50% in a particular stock. The stock would have to return 100% from its low to break even with your initial investment. That could take a long time. SunAmerica GNMA Fund is specifically designed for investors who want a lower risk investment. In a volatile financial market, it provides a way to potentially help preserve capital and lower risk in an investment portfolio. Since I took over 10 years ago, we only lost money for our customers in one year (1999) and that amounted to 0.07% of the principal. Our strategy has worked well both in the downturn and also during the financial bubble. Obviously, past return is no guarantee of future return.