Industry News

TRIAL BY FIRE

In the May/June 2010 edition of the Profit Sharing/401k Council of America's publication Insights, there is an article written by Kevin Vandolder and Scott McLerran from the consulting firm EnnisKnupp with the subtitle, "Stable value funds passed the "trial by fire" of the recent economic downturn." The article starts out by mentioning that 75% of DC plans with 1,000 or more participants have allocated more than 19% of their total assets to stable value and that returns are between 75 to 125 basis points over money markets net of all costs. The article went on to say that "Even at the height of the economic crisis, stable value was delivering a strong excess return over money market, and market to book value ratios ...remained reasonably healthy given the external market events dipping on average to between 90% and 95%. By early 2010 most conservative and well run stable value funds were near or above 100% market to book value." (FCM's composite was at 100.2% as of 3/31/10.) The article went on to observe that in 2009 money market funds returned only 0.3% as contrasted with the average stable value fund return of 3.4%. (FCM's composite of separately managed accounts returned 4.30% in 2009 before expenses and 4.14% after average expenses.) And over 10 years, the average stable value fund returned 5.0% as contrasted with money markets return of 2.6%. (FCM's composite was 5.31% before expenses and 5.15% net of expenses over 10 years.) Then the authors observed that the stable value industry is contending with wrap capacity constraints due to several wrap providers exiting the business but that they are hopeful that "a combination of revisited (investment) guidelines and risk controls and ...pricing will encourage new entrants." They also mentioned that they have been working with clients to move away from "global wraps" to individual mandate wraps. "In the end, the goal of achieving 75 to 125 basis points over money markets will have a chance of being achieved and participants...will be rewarded for their confidence in stable value."

(Source: Insights and FCM)

Updated 3/21/11