Why is Stable Value Attractive?
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By taking advantage of all the investment alternatives offered to a stable value fund, FCM can opportunistically select the appropriate investments that will produce attractive returns. We use liquidity management and duration management to improve our portfolios’ tracking efficiency and to manage the cash flow distortions that are inherent in a stable value fund. The stable value market place is inefficient and capitalizing on that fact brings significant benefits to participants in the form of attractive returns.

Plan sponsors, working independently or with an investment manager, should manage their stable value fund in accordance with a preapproved set of investment guidelines. The appropriate due diligence must be conducted prior to asset selection since the guidelines will dictate a minimum level of credit for each investment commensurate with the level of risk to the portfolio. The returns are measured against a variety of performance benchmarks of similar credit and duration..

For calculating performance, FCM uses the AIMR approved Modified Deitz methodology. FCM portfolios are valued, including accrued income, using book value at the end of every month. Every cash flow into or out of the portfolio during the month is weighted by the amount of time it is held in the portfolio to determine the portfolio’s monthly return. By linking the monthly returns we determine quarterly and annual performance and then rigorously compare that performance to several benchmarks. Based upon capital markets history, the stable value fund on a book value basis is expected to at least equal: 1) 91 Day T-Bills plus 1.25% annualized over each three year period, 2) CPI plus 1.75% annualized over each five year period, and 3) a weighted benchmark of 50% Merrill Lynch 1-2.99 years and 50% LBGC intermediate (approx. duration of 2.6 years) annualized over each eight year period. Importantly, on a book value basis, FCM’s composite return has performed quite well relative to these performance measures over the past 10 years, as noted elsewhere in this Update.

Over the past year or so, the Stable Value Investment Association (SVIA) formed a Performance Measurement Task Force with the objective of developing a practical framework for performance analysis of stable value funds with primary emphasis on meaningful return comparisons between funds. The Task Force believes that book value reporting is still the best method for participant accounts, but that some type of "fair value" needs to be introduced to measure performance. Since there is no active secondary market for GICs, the term "fair value" is used for what would otherwise be regarded as "market value." Should a market value performance measure be widely accepted, FCM is confident that our composite return would perform very well compared to the industry, given the fact that FCM has tracked very favorably with measure 3 described above.

However, it may not be appropriate to evaluate the stable value manager and therefore the plan sponsor on a different basis than that used for reporting to participants. In fact, the Securities and Exchange Commission (SEC) prohibits mutual funds from reporting performance with more than one set of numbers. Stable value contracts are not traded intra-term and are continuously valued at par (book value) for participant accounts. The FASB and AICPA call for book value treatment of benefit responsive stable value contracts. Trying to force a "fair value" on performance may lead to a review of the book value treatment the industry has worked hard to maintain. Lastly, it is human nature to manage to whatever standards we are held accountable, and so it is important that there be performance measures consistent with how the participant will measure us since they are the customer for whom ERISA holds us responsible.

Participants are looking for preservation of capital and attractive stable returns. Developing prudent investment guidelines and performance measures consistent with conservative investment practices and creating a diversified portfolio of high credit-worthy investments will result in preservation of capital and attractive returns.

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