Managers of the best performing mortgage-backed securities funds are taking a cautious approach amid the refinancing wave and hoping that mature loans will see them through the deluge.

"The main reason for good performance over the last year was our reliance on seasoned (adjustable-rate mortgage) securities, which have been somewhat insulated from vast prepayments that the market has seen," said T. Anthony Coffey, portfolio manager for the Franklin Templeton Group, San Mateo, Calif.

Mr. Coffey manages both the Franklin Adjustable U.S. Government Fund, with $325 million of net assets, and the Franklin Adjustable Rate Securities Fund, with $22 million. The latter was ranked second among adjustable-rate mortgage funds by Lipper Analytical Services Inc., with a one-year total return of 7.01%, and the Adjustable U.S. Government Fund was ranked fifth, with a 6.52% annual return.

"In the next few months, I think we're going to see a sharp distinction in prepayment levels of the more recently originated loans and the more seasoned loans," Mr. Coffey said. But he plans to maintain his funds' investment profile for the time being. "It's set up to weather the prepayment storm that is likely to occur in the next couple of months," he said.

Gary E. Pzego, vice president and portfolio manager for Evergreen Institutional Adjustable Rate Fund, however, is taking preventive measures. "We're trying to increase our fixed-rate positions," he said.

Prepayments present opportunities because of the increased flow of cash that they can bring, said P. Christopher Leary, director of fixed income at SunAmerica Federal Securities.

Mr. Leary manages the Federal Securities A and B funds, with total assets of about $60 million. The SunAmerica Federal Securities A fund was ranked No. 1 by Lipper for 1997 among Ginnie Mae funds, with a 10.34% annual return. The fund invests primarily in Ginnie Mae securities and Treasuries.

"The market risk is much more challenging right now than prepayment risk," Mr. Leary said.

Steve Abrahams, mortgage analyst at Morgan Stanley, Dean Witter, Discover & Co., is recommending 15-year pass-throughs because they have done well in environments with heavy prepayment risk and interest rate volatility.

Mr. Abrahams noted that 7%, 7.5%, and 8% coupon loans, which comprise more than half of all outstanding mortgage debt-have become more refinanceable.

Bruce D. Salvog, head of taxable fixed income at Piper Capital in Minneapolis, said he plans to maintain his funds' current heavy weighting of Treasuries and to stay away from new pools of mortgages until the refinancing wave subsides. The company is a subsidiary of Piper Jaffray Inc.

"We think 1998 is probably going to be the year where income dominates more than price in the mortgage portfolio," said Mr. Salvog. "However, in the short run we are in the midst of a huge refinancing wave by homeowners."

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