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JPMorgan Introduces New Performance Metric for Stable Value

For years, the stable value industry has struggled to come up with a benchmark that would be useful for measuring the performance of stable value funds. It has been a difficult undertaking. Fund structures and investment policies vary widely from one product to the next, making apples-to-apples comparisons difficult. Book-value returns are a convenient metric for the individual investors who are the end customers of stable value funds. However, benefit-responsive contracts smooth returns and multiple factors outside the fund manager's control can influence book returns. As a result, book-value returns are of limited use to plan sponsors and consultants who want to gauge manager prowess. Market-value returns are far more helpful on that score, but without a standard market benchmark, apples-to-apples performance comparisons remain challenging.

Now JPMorgan Asset Management, a stable value manager, is taking a fresh approach to the performance measurement problem. Victoria Paradis, Managing Director of Fixed Income for the firm, says a new metric it devised could make it easier to gauge the performance of stable value investments and perhaps spur better across-the-board performance by the industry itself.

Paradis described the new metric at the SVIA's 2007 Spring Seminar in Charleston, South Carolina. The metric begins by recognizing that a universal measure of stable value risk is the relationship between a fund's underlying asset market value and the fund's total book value. The closer the two values stay to each other, the less risk a fund has incurred. When market and book values are closer together, participant cash flows have a smaller impact on returns, a fund can better respond to changing interest rates, and the fund overall experienced lower market risk. The ratio of the fund's market value and book value is a useful point in time measure. A measure that tracks this risk historically is the volatility of the changing market-value/book-value ratio over time. In short, this volatility measure offers a convenient way to gauge a fund's exposure to total stable value risk.

While money market funds should have zero market-value/book-value volatility, the relationship between those values in a stable value fund will change over time and with the markets. The key to success lies with balancing return generated per unit of risk.

To evaluate a fund's performance within this useful risk framework, JPMorgan's Stable Value team has adopted a measure of return per unit of risk. This metric measures the underlying market-value performance in relation to the stable value risk taken on to earn that performance. Paradis said plan sponsors and consultants looking at the measure would immediately know important things about a stable value fund relative to its peers. It can be useful to evaluate how competing stable value products generate return per unit of risk incurred.

Paradis urged her SVIA colleagues to consider the potential benefits of embracing the new metric. "If we as an industry adopt this approach and use it to measure stable value performance at the total fund level, it will help to make our industry more transparent. It is simple to calculate for all products. It encapsulates multiple risk measures, including participant withdrawals, benefit responsiveness, and market exposure. It shows risk exposure on a real-time basis, not smoothed, and it is less sensitive to fund start dates. It enables meaningful fund and manager comparisons."

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