Stable Value Performs “Admirably and As Advertised” through Financial Crisis

By Randy Myers

Stable value funds proved to be one of the few success stories during the financial crisis of 2008-09. At a time when most asset classes were tumbling, stable value funds continued to generate consistently positive returns for their investors.

“Stable value performed admirably and as advertised,” SVIA President Gina Mitchell told industry participants as she opened the organization’s 2010 Spring Seminar in April

Disclosing the results of a quarterly SVIA survey of 27 stable value managers, Mitchell reported that from the fourth quarter of 2008 to the fourth quarter of 2009, crediting rates for stable value funds—the rates actually paid out to investors—ranged in a fairly narrow band, from an average 3.97 percent at the start of the period to 3.33 percent at the end. At their low point in the second quarter of 2009, crediting rates averaged 3.12 percent.

On a total book-value return basis, stable value funds earned an average of 4.75 percent in 2008, Mitchell reported, and 3.52 percent in 2009. By contrast, money market funds earned 0.7 percent and 0.03 percent, respectively. The credit quality of the fixed-income portfolios underlying stable value funds also remained high throughout the crisis, Mitchell said, averaging AA or better

While the market value of those fixed-income portfolios fell to an average of 95.56 percent of book value at the end of 2008, Mitchell said that ratio climbed back to 101 percent by the end of 2009. The market-to-book ratio is a closely watched metric in the stable value industry, since stable value funds guarantee that their investors can make withdrawals at book value, except in certain predefined circumstances, regardless of their fund’s market value.

Investors in 401(k) plans were not oblivious to the safe haven offered by stable value funds at the height of the financial crisis, Mitchell noted, transferring billions of dollars from stock funds and other asset classes into stable value funds. According to the Hewitt 401(k) Index stable value funds accounted for 22.7 percent of the assets in 401(k) plans in January 2008, but rose to 32.3 percent by the end of the year. That jump reflected declining values for other assets classes, positive returns for stable value funds themselves, and inflows of new money.

“This data gives us a great opportunity to educate retirement plan sponsors, policy makers, plan participants and the public about the value of stable value funds,” Mitchell concluded. “We’ve got a wonderful opportunity to improve and evolve to meet the changing needs of an employee base that is incredibly challenged, as well as an older population that is going to be equally challenged in generating a secure stream of retirement income. Stable value is a perfect fit for both of these groups of people in this dynamic world. They need a constant, and stable value provides that.”