In this updated study, we reexamine the past history of stable value (SV) funds and their performance over the past 43 years, with particular emphasis on the past 27 years. A growing volume of industry and practitioner research has provided a detailed look at how the funds are managed and stable values secured. Additionally, academic articles increasingly are including SV funds within the purview of their studies, although it is difficult to find in-depth scholarly treatments of SV funds performance outside of our preliminary working papers. The lack of rigorous performance studies is rather surprising because SV funds occupy such a prominent place among retirement investment vehicles, with over $800 billion of assets under management. That puts them roughly on par with the increasingly popular target-date funds, which reportedly held some $880.4 billion of assets under management as of the end of 2016. SV funds are offered as an investment option in over one-third of all defined contribution (DC) plans, including 457, 403(b), 401(k) and some Section 529 Tuition Assistance Plans. By February 2009, they peaked at 36.7% of their assets due primarily to stock market declines, although allocations are more typically within the 10–25% range. More ironically, the lack of performance analyses did not forestall an onslaught of articles criticizing stable value and advocating that plan participants downsize their allocations toward the SV options (e.g., (GAO 2011)).
In this updated study, we provide a rigorous analysis of the performance of SV funds, enlisting an extended data set that goes from 1973 through 2015. We also include SV return data through the end of 2016 for informational purposes only. We compare their performance to that of basic asset classes such as U.S. large and small stocks, long-term government and corporate bonds, intermediate-term government bonds, and money market funds, using three methods: mean- variance analysis, stochastic dominance analysis, and an enhanced multiperiod utility analysis. Our study shows that since the inception of stable funds in late 1988, and their precursors in 1973, none of these other asset classes has dominated them; on the contrary, SV funds have dominated money market and intermediate-term government bond funds (and nearly dominated long-term corporate bonds as well) over a wide range of risk aversion levels and, when combined with small stocks and long-term government bonds, they occupy a prominent and often dominant part in optimal portfolios.
Before concluding our study, we explain the value proposition for SV funds—how they have been able to generate notable returns for their investors—and whether the contributors to their past performance can be expected to continue into the future. We consider the recent financial crisis and revisit how the funds have weathered that crisis. We comment briefly on the themes and considerations of plan sponsors and their fiduciaries who choose not to include SV funds in their menus of options for plan participants and consider complications for incorporating SV in the increasingly popular target date funds.
Read the full paper here.