Stable Value Identity Crisis

A recent conversation with someone outside of my investment world reminded me once again that stable value managers generally toil in obscurity. Sure, stable value funds have nearly 20% of 401(k) participant assets in those plans that offer stable value, but unfortunately, many participants do not really understand "stable value" simply by its name. Though we share the same end of the investment spectrum with traditional bond managers, even those bond managers who do not personally manage stable value portfolios are often fuzzy on the nature of our business. In fact, even my wife (who does live with me and knows where I go during the day) did not know if her plan offered a stable value fund, although her plan's

"Guaranteed Annuity Option" is actually a stable value fund. That is when it hit me that my industry has an identity crisis or at least a brand recognition problem. Unlike money market funds, which are nearly always referred to as "money market funds," stable value funds have a host of different names: the Guaranteed Annuity Option, the Fixed Fund, the Fixed Income Fund, the Capital Preservation Fund, the Medium Term Income Fund, the Long Term Income Fund, the GIC Fund, the Guaranteed Fund, the Protected Income Fund, or the Insurance Contract Fund, and even the Stable Value Fund, among others.

Why does brand recognition matter? Besides the fact that it would make it easier for me to explain my job to friends and strangers alike, I worry that stable value's lack of brand recognition may lead to its being used when it shouldn't be or not being used by participants when it should be. Employed properly, stable value funds are an excellent investment option for generating significant income while rounding out participants' asset allocation, and for reducing risk in a participant's overall portfolio. Sadly, Enron participants have become poster children for the need to diversify across the investment spectrum. Moreover, I do not like to see people leave money on the table. Currently, stable value funds, by whatever name they are called, are returning about 450 basis points more than the more recognizable money market funds. Over the past 10 years, the FCM composite of managed accounts has produced a 181 basis point premium over the Ryan Cash Index. A 181 basis point average yield premium may not sound like much, but it really adds up over time. For example, a $50,000 initial investment would grow to be worth over $422,000 more at the end of a typical 45-year career if invested at 6.31% instead of a money market rate of 4.50%!

On the lower end of the risk spectrum, money market funds are often the most recognizable investment option that participants' may have available to reduce risk in their portfolios. However, when both money market and stable value options are offered, if participants are not familiar with stable value funds, they may default to money market funds by virtue of their name recognition when they would likely be better served by their "stable value" fund, by whatever name it is called. Most people recognize money market funds and think they have a pretty clear picture of them. However, as the annual John Hancock Defined Contribution Plan Survey has repeatedly revealed, few people actually understand what money market funds invest in or how managers make them work, but it does not seem to matter much. In the 2001 survey, participants ranked their knowledge of money market funds second only to their own company stock. (I wonder how many ENRON employees were included in the survey?) Nonetheless, as many as 44% of participants thought that money market funds invest in stocks and 43% thought they invest in bonds. But participants do have a fairly good understanding of the risk level of money market funds, ranking them below six other asset classes and above only bonds and stable value. Well, they got that half right since as you know bonds are actually higher risk although stable value funds have demonstrated lower historic risk as measured by standard deviation than money market funds, as illustrated by the scattergram included elsewhere in this UPDATE.

Even though the John Hancock survey revealed that participants think money market funds will earn as much as 12.0% annually over the next 20 years in contrast to a mere 10.8% expectation for stable value, as indicated above by the 181 basis point historic premium of the FCM composite, stable value has actually provided a significant monetary reward over money market funds for a small increase in the potential risk from lower securities liquidity. Unpleasant as they were, even the GIC issuer defaults of the early '90s were primarily a liquidity event since virtually all of the participant's effected ended up receiving at least 100 cents on the dollar. Since then, risks have decreased as stable value funds are now far better constructed, diversified and managed. Analysis and credit oversight of issuers and investments is also far better. As we all know, there is no guarantee in life (even money market funds sometimes "break the buck") but the liquidity and default risks of money market funds and stable value funds have grown closer together, not farther apart.

Perhaps "Stable Value" simply needs a more descriptive name that zeros in on the real appeal: for example, "$ Preservation Plus." The name "stable value" has always struck me as somewhat bland and really misses the point - these funds preserve money! Our industry should mass market the name and drive home the message that "your money will be preserved plus you'll get better earnings than money market." Market it to participants, to plan sponsors, in print and on TV. (The AFLAC duck comes to mind.) Market this simple concept in a simple way. Don't try to convince the world that the value lies in the ever-growing complexity of the tools applied to the management of these funds. Our tools are complex, but the purpose of the fund remains simple - preserve principal plus provide an excellent return relative to the minimal risks!

The message should be SIMPLE! The skills of a bond manager may be needed for these funds but they are not bond funds. Stable value funds preserve assets and relentlessly provide positive returns at an attractive rate. A lot of participants want and need just that, particularly as they grow older. Participants who have access to but do not include stable value in their asset allocation may begin doing so if they had a better understanding of the investment option. Motivated participants may begin asking employers who do not include stable value to begin doing so. Contemplate the success of drug company campaigns that have consumers asking their doctors for the drug company's brand.

Stable value is having an "Identity Crisis" and needs brand recognition to raise participants' awareness of the great attributes and strong benefits to participants of this asset class. The dramatic stock market decline and continuing volatility have captured everyone's attention. Now, those of us with a full appreciation for the benefits of stable value need to focus participant attention to maximize their benefit in the future from this under-appreciated asset class.