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Recent Stable Value Pooled Fund Trends

This article will cover recent trends within Stable Value pooled funds including growth, issuer consolidation, maturity, credit, global wraps and returns. These trends are based on the Hueler Analytics Pooled Fund Comparative Universe of Stable Value (Universe), which represents 80 percent of the pooled fund market. Developed by Hueler Companies, an independent research firm providing data and systems to the Stable Value marketplace, the Universe now comprises 25 funds with assets totaling over $66 billion.

Universe Growth

Quarterly and annual cash flow into Stable Value pooled funds has slowed in relation to the quarterly growth rate that the Universe has observed over the last several years. The Universe data as of 12/31/03 reveals that growth was virtually flat from 3Q03-4Q03 showing a .31 percent increase during the quarter as compared to the average quarterly growth rate over the past five years at 4.40 percent.

Even with the slow down in cash flow during the fourth quarter of 2003, the one-year growth rate was 14 percent. While the 2003 growth rate was still positive, it is lower than the average one year Universe growth rate over the past five years of 20 percent.

Hueler Analytics Pooled Fund Universe Annual Change in Universe Dollars vs. Annual Growth

Issuer Consolidation

Since the mid to late 1990's, the demographics of the number of issuers writing business to the Universe has changed. The number of issuers providing Stable Value products to the industry has decreased due to mergers and providers that have exited the business. Based on the historical data tracked in the portfolio holdings of the pooled funds, as of 12/31/98, there were approximately 50 Guaranteed Investment Contracts (GIC) and 34 wrap providers represented in the portfolio holdings within the Universe. Five years later, those numbers are less than half demonstrating the consolidation the industry has experienced. The data shows that eight wrap providers currently wrap approximately 70 percent of all synthetic contracts in the Universe. Of these eight issuers, each of them currently wraps seven percent or more of the total Universe dollars. In comparison, five years ago, there were only three wrap providers that wrapped five percent or more of Universe synthetic assets equating to less than 20 percent of Universe assets.

Maturity and Credit Quality

Maturity is one of the characteristics that have remained relatively static over time. Over the past 10 years, the average maturity of the Universe has been within a range of 2.3 to 2.8 years, although more often than not, within an even tighter band of 2.4 to 2.6 years. The average maturity of the Universe has seen a continuous increase over the last six quarters, and as of 12/31/03 the average maturity was at 2.76 years.

Although the average credit quality of the Universe has not changed significantly over the last several years, there has been a definite change in the spread between the average Moody's and S&P credit quality. The credit quality spread of the Universe has dramatically narrowed over time and stayed within a much tighter range, especially within the last four to five years. The combined average credit was Aa3/AA+ in 1992, moved up to Aa2/AA+ in 1993, then up to Aa1/AA+ in 1995 where it has remained ever since that time.

Global Wraps

Since Hueler Analytics started reporting on global wrap contracts in the Universe on an aggregate basis, the total global wrap dollars have grown from 17.6% of the total Universe dollars in fourth quarter 2002, to over 26 percent as of fourth quarter 2003. Almost $7 billion has been added to these contracts during this period and currently 11 of the 25 participating funds have one or more global wraps.

Returns

According to the Hueler Analytics Stable Value Pooled Fund Index, the one-year index return for the period ending 12/31/03 was 4.72 percent as compared to the one-year return of 5.61 percent for the period ending 12/31/02. As illustrated in the Fixed Income Index Comparison graph, Stable Value returns remain strong in comparison to money markets and Stable Value continues to show less volatility than bonds.

Fixed Income Index Comparisons 12/31/87 - 12/31/03

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