Study Backs Value Add from Stable Value Assets

According to the study by authors David F. Babbel of the Wharton School, University of Pennsylvania and Miguel A. Herce, Charles River Associates, stable value funds have dominated money market and intermediate-term government/credit 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, occupy a prominent and often dominant part in optimal portfolios

The authors contend that the funds “have proven to be quite popular in defined contribution plans” because their stability, predictability, and preservation of principal help to foster consistent savings habits (as contract values are preserved and only increase over time), which can add a measure of confidence among savers as they prepare for their future needs.”

SV funds occupy a prominent place among retirement investment vehicles, with over $800 billion of assets under management. They are also offered as an investment option in almost half of all defined contribution (DC) plans, including 457, 403(b) and 401(k) plans, and by February 2009 reached 36.7% of their assets. They are also available to participants in some Section 529 Tuition Assistance Plans.

Babbel and Herce used the new study to explore the performance of SV funds vis-à-vis U.S. large and small cap stocks, long-term government and corporate bonds, intermediate- term government/credit bonds and money market funds, during the period February 1973 through December 2009.

The authors concluded that operating from within a defined contribution program may give SV funds the best environment in which to seek their optimal performance.

“To be able to maintain the attractiveness of their funds, SV fund managers will need to continue facing yield curves that generally have positive steepness. High quality assets that offer attractive yields due to lower liquidity, negative convexity (which does little harm to stable yields), and adequate credit spreads must continue to be available at suitable prices,” the authors wrote. “Furthermore, for SV funds to seek such yields will require that they be offered only through vehicles such as defined contribution programs which cater to investors willing to be patient, while eschewing day traders and interest arbitragers. Stable value funds would probably not survive outside of that kind of protected environment.”

Information about obtaining the report is at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734991.