One fund manager says investors looking to buy stocks, but worried about the impact of recession, should look at a company that actually does well during turbulent times.

Annaly Capital Management (NLY), a real estate investment firm that buys agency mortgage-backed securities, is one company that typically makes money during times of recession, says Adam Strauss, portfolio manager at Appleseed Fund.

“Annaly is in the spread business. So they make money when there’s a sharp difference between long-term and short term interest rates.  They borrow using repos, which are short-term interest rates, and they invest in agency mortgages,” says Strauss.

During times of recession, like today, the Federal Reserve usually tries to keep interest rates low.  But the rates on these agency mortgages are higher and right now the spread is at a large 1.71%, says the portfolio manager.

The banking sector, says Strauss, has been hit with a decrease in non-interest income and huge losses in loans that need to be offset by earning money in the spread.  Annaly earns money on the spread, but does not face the losses banks do because the agency securities it invests in are backed by the U.S. government.

If the Fed keeps rates low for a long time, which seems very likely, Annaly should be able to generate a lot of income, he says.

The agency mortgages Annaly invests in, according to Strauss, are backed by Fannie Mae (FNM) and Freddie Mac (FRE), so there’s an implicit guarantee by the government and there are no loan loss provisions in them, as there would be from a normal bank.

While with many stocks an investor is looking for a return in the form of a higher share price so he or she can sell it later and make a profit, with REITs such as Annaly the focus is on the dividend it pays out, says the portfolio manager.  For Annaly, that rate is near 15%, he added.

But if the stock acts like it has during previous economic environments where there’s been a large spread, the share value could jump, he says.  In the past, when the market has gotten excited about the stock, its value has gone up, trading 1.4 to 1.6 times its book value -- so it could appreciate by up to $20 or so, he added.

At the time of the interview, the stock was trading below Appleseed’s estimated book value of $14 per share, according to Strauss.  “You’re buying a great asset for a great price with a strong, experienced management team.”

Annaly has been publicly traded since 1997, says Strauss.  Though there have been a few recent competitors sprouting up in the last year or so, none have the track record of this firm, he said.

Annaly makes up about 4.3% of the Appleseed Fund’s portfolio.  Appleseed fund (APPLX) is a value-oriented SRI mutual fund that has $13 million under management.  It was ranked the number one mid-cap value fund by Lipper in 2008.

Asked what type of person this stock would be in ideal investment for, Strauss said, “it’s great for income-oriented investors with its 15% dividend yield, but we think it’s an investment that should outperform the market.”