No Stomach for Stock-Market Swings? Consider Stable Value Funds
For risk-averse investors, there seems to be nowhere to hide these days. High volatility and high valuations make stocks an unsavory option, and bonds don’t look much better in the face of rising interest rates. And cash still pays next to nothing. But if you have a 401(k), you have an oft-overlooked option.
Stable value funds—found only in employer-sponsored retirement plans—combine high-quality fixed-income portfolios with an insurance wrapper. When times are good, investors earn less than they would without the protection, but when things get choppy, the insurance kicks in and protects their principal. In 2008, when intermediate bond funds lost 4.7% of their net asset value, these funds returned an average of 4.6%, according to Hueler Analytics, a Minneapolis-based firm that tracks and analyzes stable value funds.
These funds have been around for decades but could be particularly useful to income-seeking investors today. They yield somewhere between short-term bonds and intermediate bonds—nothing to build a nest egg on, but enough to keep pace with inflation. The universe has averaged a 2.3% total return over the past decade through Aug. 31, according to Hueler. Over the past year, returns have hovered just above 2%.
Despite assets of $758 billion, according to the latest figures from the Stable Value Investment Association, these funds are the wallflowers of the investment world. They don’t trade like traditional mutual funds, and information about them isn’t widely available—even financial advisors aren’t required to learn about them. “Stable value funds have unique characteristics that not a lot of data providers have adjusted for,” says John Faustino, chief product and strategy officer at Fi360, a fiduciary education, training, and technology company. Both Fi360 and Hueler Analytics offer online tools for advisors wanting to do due diligence on stable value funds.
But investors must rely on plan sponsors to choose the funds for them. Roughly half of all defined-contribution plans have a stable value offering, typically just one and increasingly in lieu of a money-market fund. The question for investors, then, isn’t which fund to choose, but whether this is a good fit for their portfolio, and whether that particular fund is up to snuff. The largest by far is the Wells Fargo Stable Returns fund, with nearly $27 billion in assets, followed by the $19.5 billion Vanguard Retirement Savings Trust, and $15 billion T. Rowe Price Stable Value fund.
The funds employ different investment strategies, and expenses can also run the gamut. “Some have explicit expense ratios, and others capture it in the spread with what they’re trading,” says Faustino, who recommends looking at net yield to understand the cost. If your fund’s yield is considerably lower than its peers’, it could reflect higher costs. “Investors shouldn’t look at expenses in isolation,” Faustino adds. That said, expense ratios average 0.4% to 0.65%, according to Hueler Analytics.
The funds can have different liquidity requirements, but that shouldn’t affect most individual investors. “In a typical stable value fund, you can move between investment options like you would any other fund, just as long as there’s not a competing fund, which there typically isn’t,” says Kelli Hueler, founder of Hueler Analytics. “This is why most plans don’t offer a stable value fund and a money-market fund.”
As interest rates rise, money-market funds may reflect that change sooner, but over time, stable value funds should track broader interest-rate trends. “That’s what they’re designed to do,” says Hueler. “They’re not supposed to shoot the lights out.” But in volatile times, they might help keep the lights on.
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