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The Advantages of
Pooled Stable Value Funds

A pooled fund is an effective way for very small plans to gain access to stable value, especially since so few stable value managers are willing to manage small separate account portfolios, and it is certainly much better than offering no stable value fund at all. Unlike many of our competitors, FCM does individually manage small separate account stable value portfolios to accommodate the specific needs of individual plans, however, changes in management style must be made. If a stable value portfolio is smaller in size, it may be necessary to reduce the reinvestment cycle from monthly or quarterly to semi-annually and for very small portfolios, to an annual reinvestment schedule. While this approach does give the plan access to the quality fixed investments available to stable value

funds, higher concentrations in fewer issuers may result. Likewise, the portfolio will take on increased interest rate risk and will not track changes in the interest rate environment as quickly.

Why is stable value so desirable? For a number of years now, the tremendous bull run in the equity markets has caused many plan sponsors and participants alike to overlook stable value funds in favor of double-digit returns. Preservation of principal and steady 6.50% to 7.50% returns with less volatility than money market funds simply did not compare well. However, with the recent events in the equity markets, the fundamental strengths of this asset class illustrate the very real value of stable value and confirm the wisdom of asset class diversification along the risk/reward continuum when an investor is trying to accumulate wealth over time.

Of course, the technical underpinnings of stable value, while not recognized by many participants, are fully appreciated by plan sponsors sensitive to their fiduciary responsibility. The opportunity to diversify among the universe of fixed investments and issuers promotes the protection of principal. Larger plans can set lower concentration limits, further reducing default risk and invest more frequently, thereby spreading reinvestment risk. A critical mass of $1 million up to about $10 million is necessary for each investment program in order for a fund manager to receive premium pricing. Lower amounts can be taken to market, however, issuer expense breakpoints begin to erode investment returns, and diversification opportunities become diminished, as some issuers do not quote on smaller investments. Also, it may be necessary to invest less frequently to achieve critical mass.

At some point, the sponsor of a small plan may begin to question whether the advantages of a separate account stable value portfolio uniquely tailored to the plan's needs continue to outweigh the advantages of increased diversification and reduced interest rate risk. Here is where pooled stable value funds offer the most value. Pooling the stable value portfolios of many smaller plans, a pooled fund manager reaches the critical mass where investment cycles can be increased to quarterly or even monthly and concentration levels can be significantly reduced.

However, there are some higher embedded costs in a pooled fund. Trust, plan level record keeping and custodial fees all add up. Issuers of insurance company debt (traditional GICs) and synthetic GIC wrap contract issuers may assess somewhat higher withdrawal risk charges. And finally, a plan sponsor must get comfortable with the investment guidelines of the specific pooled fund they are considering, since individually tailored investment guidelines are only possible with an individually managed account. However with returns comparable to those of bond funds and volatility even less than that of a money market fund, pooled stable value funds still offer significant advantages over the use of the other fixed investment alternatives; money market funds and short-term bond funds.

Participants have historically demonstrated their preference for stable value funds no matter what they have been called - Guaranteed, GIC, Interest Contract, Stable Value, Protected Income, etc. In virtually all plans where stable value and short-term bond funds are offered, the participant allocation to stable value is much higher and for good reason. Over the 12½ year history of the composite of FCM's individually managed stable value funds, the composite with an annualized rate of return of 7.63% has outperformed 91-day T-bills by 2.00% per year with less volatility and has also exceeded its durationally equivalent tailored benchmark consisting of the Merrill Lynch 1-3 and LBG/C intermediate bond indices each weighted 50%, both of which have demonstrated much more volatility than either money market or stable value funds.

FCM launched its own proprietary commingled stable value pooled fund, the Fiduciary Capital Preservation Plus Fund, just a year ago to respond to the interests of small defined contribution plans and defined benefit plans of all sizes who find high quality, excellent diversification, bond-like returns and low volatility attractive. As of June 30, 2001, the Fund's 12 month return was 7.36% which places it far above the average pooled fund return of 6.50% for the same time frame, as reported by DC Plan Investing in their July 24, 2001 issue, and certainly attractive relative to the returns of the equity markets over the past year.