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Why Stable Value? It Works!

This article draws upon SVIA's White Paper, "Why Investors Want Stable Value," in explaining the unique characteristics that draw investors to Stable Value funds. "Why Investors Want Stable Value" is available in SVIA's Library at www.stablevalue.org.

They say that a rising tide lifts all boats. However, when it comes to retirement investing that old axiom has many looking for the dark side or a hole in the silver lining of the stock market's continued rebound. Some might expect that Stable Value funds would pay for equities' newfound gains in the form of outflows chasing strong equity returns. However, it is not a zero sum game.

To put it simply, defined contribution investors invest in Stable Value because it works. In over thirty years of history, Stable Value funds are one of the few asset classes that consistently generate positive returns in all market cycles. In fact, they provide three major benefits to investors:

• Returns that are generally higher over the long-term than money market funds and cash.

Stable Value funds outperform money market funds during most market environments because they invest in intermediate-maturity fixed income investments, which should provide higher returns than money markets over time. In fact, according to the Hueler Companies FirstSource Separate Account Stable Value Index, Stable Value funds have outperformed money market funds more than 85 percent of the time.¹ An individual who invested in Stable Value funds in 1987 rather than money market funds received an additional 15 percent cumulative return or approximately one percent more return per year, year after year.²

• Less risk to principal than most bond funds.

Stable Value funds tend to produce returns over the long-term roughly similar to intermediate-maturity bond funds. Unlike bond funds, however, Stable Value funds do not fluctuate in principal with changes in interest rates. This is because they invest in book value contracts (companion wrapper agreements or guaranteed investment contracts or GICs), which provide protection of principal and accumulated earnings for investors. As a result, the volatility or risk inherent in Stable Value funds is substantially less than that of an intermediate bond fund.

• Returns less correlated to equities than money market or bond funds.

Stable Value has a modest correlation with equities, which means that a mix of stocks and Stable Value will improve the risk return tradeoff over a portfolio of stocks alone. And because Stable Value has less correlation to equities than other conservative investments, it is a more effective tool to modulate risk and return in an investor's retirement portfolio than money market or intermediate bond funds.

These three benefits are further highlighted in the following chart.

Stable Value funds have provided returns similar to bond funds with less than half the volatility of bonds. Because of these unique characteristics, inclusion of Stable Value funds in the asset allocation process for retirement investing allows investors to construct more efficient portfolios ? portfolios that can achieve a higher expected return for a given risk level, or a reduced risk level without sacrificing returns ? than is possible with other conservative investment options such as bond and money market funds.

Given our societal trend and economic reality that workers increasingly bear the investment risk and responsibility for retirement savings, an investment vehicle that provides bond-like returns, money market-like volatility and liquidity, and low correlation with equities is a useful tool in helping workers provide for their own retirement security. These attributes are present in Stable Value funds, which defined contribution investors have appreciated in the past and will continue to appreciate in the future. That's why Stable Value funds play an important role in not only helping Americans save for their retirement but also maintaining their financial security during retirement. And that's why despite some rebalancing (illustrated in the following graph)⁴ in response to equity market ups and downs, Stable Value funds are a core investment for retirement savers and retirees.

Hewitt 401(k) Index Asset Allocation Over Time

¹Hueler Companies, FirstSource Separate Account Stable Value Index, June 30, 2003. FirstSource, tracking 180 Stable Value funds totaling $71 billion in assets, reports that on an annualized basis, Stable Value funds have outperformed the Lipper Money Market Index from December 1987 to June 30, 2003.

²Ibid.

³Deutsche Asset Management, Deutsche Asset Management Five-Year GIC Index, June 30, 2003. The Deutsche Index was used as an approximate for Stable Value.

⁴Hewitt 401(k) Index^TM Observations. Lincolnshire, Illinois.: Observations December 2003 to 1997 and January to February 2004. The Index covers $68 billion invested in 401(k) plans by 1.5 million plan participants.

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