By Gina Mitchell, SVIA
A question that always comes up with any investment is, “What are the returns?” The answer to that question typically looks at past performance as the most important indicator. Most stable value funds have created a model to illustrate past performance for the stable value asset class. Many simulate stable value performance based on a model that wraps a bond fund index.
SVIA can now help answer the return question based on actual stable value performance across a broad cross section of investment management styles and assets. This answer is based upon the research of Professors David Babbel, Ph.D., and Miguel Herce, Ph.D. They reviewed stable value performance from September 1988 through 2009. Using their research, which tracks nine stable value fund complexes, the professors have created SVIA’s Stable Value Composite. The Composite includes a cross section of life insurance: general accounts and separate accounts, pooled funds, and externally managed separate accounts that comprise a significant chunk of all stable value assets. The assets covered in this research have grown over 21 years from $359 million to $236.5 billion.
The Composite (Chart I)
Chart I focuses solely on the Composite. It provides views of the Composite: equal-weighted or average return, value-weighted or asset-weighted return, maximum return, and minimum return. The maximum and minimum were provided to illustrate the range of returns within the Composite. As expected, the averages—both the equal-weighted and asset-weighted averages– fall within this range and for the later years and months of the Composite were closely aligned.
The Composite Compared to a Wrapped Index and Money Markets (Chart II)
Chart II compares the Composite to historical returns of the Wrapped Barclays Intermediate Government/Credit Index, which some have used as a proxy for stable value performance, and money market returns. The Wrapped Barclays Intermediate Government/Credit Index tracks the maximum return of SVIA’s Composite rather than the asset- or equal-weighted averages of the Composite.
When money market returns were added (iMoney Net Money Market Funds), Chart II shows that the Composite–the stable value asset class– continues to significantly outperform money market funds in most market cycles, as Professors Babbel and Herce documented with their research.
The Composite Compared to Intermediate Bonds (Chart III)
Chart III rounds out the illustration on stable value returns by adding the Barclays Intermediate Government/Credit return series, which demonstrates the volatility of bond returns.
The Composite is a useful tool that demonstrates why stable value plays an important role in defined contribution plan investing. The use of stable value allows participants to tailor their 401(k) asset allocation to a level of risk tolerance that he or she is comfortable with. As Babbel and Herce reported, stable value favorably shifts the efficient frontier of asset allocation. The Composite is another way to demonstrate how stable value enhances the likelihood of defined contribution plan investors meeting their retirement goals.