StableValueFunds EverythingYou

These funds typically invest, directly or indirectly, in high-quality short-term and intermediate-term bonds. What differentiates stable value funds from bond funds is the insurance contract: stable value is a bond portfolio covered by an insurance “wrap” that guarantees the investor receives their principal and the agreed-upon interest rate regardless of the market value of the assets in the portfolio.

This helps reduce the participant’s overall market risk, provides stability that helps them feel more confident about investing for their future and enables them to build more diverse retirement portfolios.

In addition, for those currently in retirement, stable value is well suited to help retirees preserve the wealth they’ve accumulated at a time when they can least afford to experience a significant loss in portfolio value since they do not have an extended time frame from which to recover from adverse market outcomes.

These wrap contracts enable plans to hold the assets supporting the contract at “book value.” Book value allows securities to be held at the price paid for them plus interest at a rate determined by a crediting rate formula included in the contract regardless of the market value. These contracts provide daily liquidity for participants to transact at book value, regardless of the current market value of the assets.

Stable value can take many forms, including collective investment trusts, separate account GICs, traditional GICs, synthetic GICs and insurance company evergreen general account solutions.

In a Traditional GIC or an insurance company evergreen general account solution, the crediting rate is the interest rate established by the insurance company for the defined time period.

For pooled funds (CIT’s), separate account GIC’s and Synthetic GIC’s, the net crediting rate is effectively the yield of the underlying portfolio minus expenses along with an amortization of market value gains/losses over the duration of the asset portfolio. Crediting rates track the general direction of interest rates with a slight lag in both rising and falling interest rate environments.

This means participant values do not change daily due to day-to-day changes in the market values of the underlying portfolio of assets. Stable value smooths out the underlying market volatility by resetting the crediting rate periodically.

Comparing stable value to intermediate bonds can be challenging, as intermediate bonds have been highly volatile relative to stable value. However, a dollar invested in stable value 24 years ago would have returned nearly the same as a dollar invested in intermediate bonds but with far less volatility during that time period. That same dollar invested in money market funds would have returned less than half.

• Look at consistency of performance across multiple time periods, for example, 1-, 3-, 5-, 10-year and since-inception returns.
• Don’t compare net crediting rates in a vacuum. Consider the underlying investment strategy and investment managers that support that crediting rate. 
• Compare the historical market-to-book ratio against other funds and the prevailing market environment, not just whether it’s above or below 100%. 
• Don’t look at fees in isolation. Evaluate fees holistically, as it’s important to understand what you’re getting for the fees you’re charged. Selecting a well-run diversified stable value fund backed by a top-rated guarantor(s) that charges a little more can add value if it generates higher returns.
• Consider a funds exit provision and the impact that has on the investment philosophy, duration and crediting rate. Funds with a 12-month put exit provision will typically have a shorter portfolio duration while funds with the lower of book or market value exit will typically have a longer duration profile.