Industry News

STABLE VALUE: Has The Value Proposition Changed?

In the July/August 2011 edition of the Profit Sharing/401k Council of America, newsletter, Defined Contribution Insights, there is a column with the title above authored by Ben Baldridge and Gina Rowland who are Senior Investment Research Analysts at the Newport Group. The article starts out by observing that "The two most prevalent capital preservation vehicles in defined contribution plans are stable value and money market funds. Under the majority of historical interest rate scenarios, stable value vehicles have generated higher returns and lower volatility than money market vehicles." The article then goes on to observe that the return advantage has generally been about 100 to 125 basis points due to the fact that the yields of short-and intermediate-term bonds held in the stable value funds are generally higher than money market instruments most of the time except when interest rates are rising very rapidly. The article then discusses the fact that stable value wrap fees have increased from an average of about 7 basis points up to about 20-25 and that wrap issuers have tightened investment guidelines which may also reduce returns to stable value portfolios in the future. However, we would observe that returns will be lower simply because of the historically low interest rates that currently prevail, and here at FCM our Investment Committee independently made the decision to shorten portfolio durations in reaction to that very low interest rate environment. In addition, we have always focused on lower risk investments that we felt were most appropriate for stable value even before the wrap writers requested these changes to be made by our competitors. The article concludes by saying "While higher wrap fees and more restrictive guidelines have reduced expected returns, stable value funds continue to provide the promise of capital preservation and higher expected returns than money market funds. Thus, although the value proposition of stable value funds has changed over time, we continue to recommend that plan sponsors offer stable value funds as a capital preservation vehicle within defined contribution plans when an appropriately structured and well managed fund is available."

(Source: Insights and FCM)

Updated 8/17/11