Stable Value Fund Investing 101: A Comprehensive Guide

Stable value funds are a type of investment that provides a low-risk option for investors. They combine elements of bonds, stocks, and mutual funds to create a stable return over time.

One key feature of stable value funds is their ability to maintain a stable net asset value (NAV). This means the value of your investment will remain relatively consistent, even in times of market volatility.

Investors can expect to earn a return on their investment, typically ranging from 3-6% per year. This is a relatively low-risk option compared to other investments, such as stocks or real estate.

To invest in a stable value fund, you can either open a new account or transfer existing funds to a stable value fund. This can be done through a brokerage firm, bank, or online investment platform.

Recommended read: Value at Risk Modeling

A stable value fund is a type of investment that provides a guaranteed rate of return, regardless of market fluctuations. It's designed to balance liquidity and stability, allowing investors to access their money when needed.

Separate Account Guaranteed Interest Contracts, also known as Separate Account GICs, are a type of stable value fund that combines the benefits of traditional GICs with added investment flexibility and control. They're invested in individual or commingled separate accounts owned by the insurance company.

These funds are evergreen, meaning they don't have a defined maturity date, and the interest rate resets periodically, typically quarterly. This provides a more dynamic and flexible investment option for investors.

Synthetic Guaranteed Interest Contracts, or Synthetic GICs, are another type of stable value fund where the portfolio of bonds is owned by the plan or trust and managed by an asset manager selected by the plan sponsor. The plan sponsor also enters into a contract with a wrap provider to provide book value accounting around the asset portfolio.

Stable value funds can take many forms, including collective investment trusts, separate account GICs, traditional GICs, synthetic GICs, and insurance company evergreen general account solutions.

You might like: Investment Analysis & Portfolio Management

Stable value funds can be structured in one of three ways: as a separately managed account, a commingled fund, or a guaranteed insurance company account.

A separately managed account is a stable value fund managed for one specific 401(k) plan. This structure is unique to each plan and offers personalized management.

A commingled fund pools together assets from many 401(k) plans, providing the benefits of diversification and economies of scale for smaller plans. This structure is ideal for smaller plans that can't afford to manage their own assets.

All stable value funds are diversified portfolios of fixed income securities that are insulated from interest rate movements by contracts from banks and insurance companies. These contracts provide protection and stability to the fund's value.

Consider reading: What Is Face Amount of Life Insurance Policy

A GIC/General Account Contract is a type of stable value fund that provides principal preservation and a specified rate of return over a set period of time.

This type of contract is typically issued by an insurance company, which holds the invested assets in its general account.

The invested assets are owned by the insurance company, as stated in Example 5, and the insurance company guarantees the principal and interest for the duration of the contract.

GIC/General Account Contracts often have a defined maturity date and a set rate of interest for the term, similar to a traditional GIC.

In contrast, Separate Account GICs, as mentioned in Example 4, are evergreen in nature and do not have a defined maturity date.

The insurance company's financial stability is crucial in a GIC/General Account Contract, and investors should be aware of the risk of the insurance company becoming less financially stable, as noted in Example 6.

Most stable value funds mitigate this risk by purchasing contracts from multiple issuers, but it's essential to research and understand the contract issuer's financial stability before investing.

Consider reading: Conditional Value at Risk

The growth of a dollar over time is a key consideration for anyone investing in stable value funds.

In the same period, the growth of a dollar is comparable to intermediate bonds.

Intriguing read: What Are Growth Stock Mutual Funds

Stable value funds remain stable, not growing in value but also not losing it. They're guaranteed to keep your principal safe, even in times of recession or stock market volatility.

In fact, the insurer must compensate the fund for any losses, ensuring you receive the agreed-upon interest payments. This level of security comes with extra management costs and fees, which can be a drag on the already lower yields.

These funds are nearly as safe as money market funds, thanks to the insurance piece. They're an option in many retirement plans, but often carry lower yields and higher fees.

A stable value fund is an insured bond portfolio that's popular with investors who have low risk tolerances.

These funds are nearly as safe as money market funds, thanks to the insurance backing them up.

Keep in mind that a stable value fund is often an option in many retirement plans, but it may come with lower yields and higher fees.

Here are some key points to consider:

Stable bond funds are a great option for those who want a low-risk investment. They don't lose value, even in times of recession or stock market volatility.

These funds are guaranteed, meaning the owner receives agreed-upon interest payments and keeps their principal intact. The insurer must compensate the fund for any losses.

Stable bond funds come with extra management costs and fees. These costs can be a drag on the already lower yields offered due to their low risk.

Lower yields mean less potential for growth, but also less risk.

A unique perspective: Vanguard Total Bond Market Index Etf

Investing in stable value funds can provide a sense of security for your retirement portfolio. A stable value fund is often an investment option in qualified retirement plans such as 401(k) plans.

Recommended read: Are Vanguard Target Retirement Funds Good

Most professional financial advisors recommend a mix of safe but low-yielding investments and risky but potentially rewarding investments, with a gradual reweighting towards safety as the investor approaches retirement age. This is because a portfolio weighted too heavily in lower-yielding investments like stable value funds risks being squeezed by inflation.

Stable value funds can provide a low risk option for retirement plans and help diversify 401(k) asset allocation for all investors. They are also a popular choice for defined contribution plans.

Here's an interesting read: Venture Capital Investments

Investing in bond funds can be a great way to add stability to your portfolio, but it's essential to understand the pros and cons.

Stable value funds are designed to remain stable, meaning they don't grow over time, but they also don't lose value either. They're a low-risk option for retirement plans and can provide stability for investors seeking to minimize volatility.

Investors should be aware that stable value funds come with extra management costs and fees, which can be a drag on the already lower yields. Historically, their fees have been in the low range compared to most mutual funds, but insurance companies have been increasing their fees due to the perceived risks of a more volatile market.

A different take: T Rowe Price Global Allocation Fund

A stable value fund may also be an appealing alternative to lower-yielding vehicles such as money market funds for the portion of an investor's portfolio that is used to counter market volatility. This can provide the essential elements of balance and stability in a portfolio weighted in growth investments.

Investors should also consider the impact of cash flows on returns. An influx of money to a stable value fund during a period of low interest rates can result in more investments at the current rate, which may dilute returns for investors.

Worth a look: Portfolio Manager Investment

Employer Initiated Events can limit the liability of contract issuers, potentially leaving investors with losses. Certain events such as major layoffs can invalidate the portfolio's contracts since they increase the possibility that an issuer would have to pay out on contracts.

Major layoffs, mergers, and bankruptcy are examples of employer initiated events that can lead to contract invalidation. Most companies generally have enough time to negotiate continued coverage for the stable value fund.

Losses in such cases are rare, since many stable value funds have survived bankruptcies without any losses. For instance, the stable value fund survived Enron's bankruptcy in 2001 without any losses.

Money market funds are widely regarded as being as safe as bank deposits, yet they provide a higher yield. They invest in short-term debt securities like US Treasury bills and commercial paper.

Regulated under the Investment Company Act of 1940, money market funds are important providers of liquidity to financial intermediaries. Historically, their fees have been in the low range compared to most mutual funds.

In the 15-year period ending March 2023, money market funds produced an annualized return of 0.55%, according to the Stable Value Investment Association (SVIA). This is significantly lower than the 2.99% return of stable value funds over the same period.

Money market returns react quickly to prime rate changes, which can be beneficial if rates are falling. However, stable value funds adjust to market rates slowly, resulting in lower returns when rates are rising.

The Fidelity Advisor Portfolio is a great example of a stable value fund that has been consistently managed by a three-person team since 2017. They have a straightforward objective: to preserve principal while earning interest income.

The portfolio has a total net asset value of $1.3 billion as of June 30, 2023. It's impressive to see a fund of this size with a consistent management team.

The Fidelity Advisor Stable Value Portfolio (FASV) invests in a variety of asset types, including U.S. Treasury bonds, government agency securities, corporate bonds, and more. This diversification helps to reduce risk and increase potential returns.

Here's a breakdown of the management fees and return history for each of FASV's three share classes:

As you can see, FASV outperforms the money market average over the long term, but underperforms in the short term. This is a great reminder that investment fees can drain returns.

Readers also liked: European Long Term Investment Fund