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What Sponsors Want

Ask managers of stable value funds what their clients want from them, and the first answer they'll give is this one: no surprises.

"Each client is different, but there is one common thread they share," observed Eugene Diou, Jr., senior vice president with Dwight Asset Management Company in Burlington, Vermont, in addressing the 2000 National Forum of the Stable Value Investment Association. "The message is this: given the guidelines we've established, don't screw up. Clients want preservation of principal, book value liquidity, and competitive returns."

The worst blunder that any stable value manager could commit, concurred Phil Suess, a principal with William M. Mercer Investment Consulting Inc., and Dennis Hurley, manager of pension and employee benefit investments for Dow Corning, would be to put itself in a position in which it was unable to meet participant withdrawal requests without penalty or restructuring.

The observations of Diou, Suess and Hurley reinforced the notion that the role of stable value in defined contribution retirement plans is first and foremost that of a safe haven for conservative investors.

Fulfilling that role, Diou observed, means that stable value managers must be diligent in measuring their performance not only by the returns they generate versus an appropriate benchmark, but also in terms of their compliance with plan guidelines, duration control (not letting cash flows drive portfolio duration), and client satisfaction.

Hurley noted that while plan participants tend to measure stable value performance by returns—are the interest rates paid out stable, predictable, and better than bank CD rates?—plan sponsors have a more difficult task. They understand, he said, that returns are constrained by other important objectives for the fund, including the quality, diversification, duration, and liquidity of the underlying portfolio.

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