Author Topic: Does a stable value fund increase overall returns in a diversified portfolio?  (Read 5817 times)

joer1212

  • Bristles
  • ***
  • Posts: 292
My company offers a "stable value fund" in their 401k and 457b plans. Should I add this to the fixed income portion of my portfolio?

I had decided against it until I recently read The Only Guide To Alternative Investments You'll Ever Need by Larry E. Swedroe and Jared Kizer. They claim that a stable value fund offers great diversification benefits when added to a portfolio of stocks and bonds, decreasing volatility, and therefore, returns for the entire portfolio.
I am a little skeptical because these authors are the same guys who also claim that commodities are a good thing for a portfolio, so I would like a second opinion on this to get some kind of consensus, if possible.

Here are the facts on the MTA Stable Value Fund I'm considering:


Fund Facts
Fund Overview as of 12/31/12
Fourth Quarter 2012 / MTA Stable Value Fund
Fund Category Stable Value
Fund Advisor Galliard Capital Management
Inception Date 10/1/1998
Total Net Assets $1,665,199,300
Expense Ratio 0.11%
Participant Withdrawal/Transfers Daily
Blended Yield (after fees) 2.68%
Effective Duration 2.79 Years

Fund Allocation
Sector Allocation of the
Underlying Fixed Income Portfolio
Security Backed Investment Contracts 69.1%
Stable Value Funds 16.5%
Separate Account GICs 14.4%
U.S. Treasury/Agency 31.3%
Other U.S. Government 2.5%
Corporate/Taxable Municipal Securities 22.8%
Mortgage Backed Securities (MBS) 27.4%
Asset Backed Securities (ABS) 6.9%
Guaranteed Investment Contracts (GICs) 0.3%
International Govít/Agency Securities 0.6%
Cash/Equivalents 8.0%

Investment Contract Issuers
Issuer Moodyís Rating S&P Rating
United of Omaha Life Ins. Co. A1 A+
Prudential Ins. Co. of America A2 AAMonumental
Life Ins. Co. A1 AAMetropolitan
Life Ins. Co. Aa3 AATransamerica
Life Insurance A1 AANatixis
Financial Products Inc. A2 A

Periods Ending 12/31/12
Fund /Benchmark
4Qí12 0.69% /0.30%
YTD 2.82% /1.27%
1 Year 2.82% /1.27%
3 Year 3.27% /1.91%
5 Year 3.75% /2.34%
10 Year 4.34% /3.38%

*Returns for periods less than one year are not annualized. Performance is net of all fees. Benchmark is the 5 Year
Constant Maturity Treasury Yield + 50 bps. While it is believed that the benchmark used here represents an appropriate
point of comparison for the Fund referenced above, prospective investors should be aware that the volatility of the above
referenced benchmark or index may be substantially different from that of the Fund; and holdings in the Fund may differ
significantly from the benchmark or index if the investment guidelines and criteria are different than the Fund.
**Expense ratio represents Galliardís investment management fee and the investment management fees for the Fundís
subadvisors.
Note: This material has been provided by a third party. Prudential Retirement does not make any representation as to the
accuracy or completeness of the information contained herein. This information is provided for informational purposes
only and should not be considered a recommendation to buy or sell any security.
The Fund is a separate account managed exclusively for the Metropolitan Transportation Authority. The Fund and the
underlying collective funds are not insured by the FDIC, Federal Reserve Bank, nor guaranteed by Wells Fargo or
any affi liate, including Galliard Capital Management. Returns also include all income, realized and unrealized capital
gains and losses, and all transactional and contract execution costs. Past performance is not an indication of how the
investment will perform in the future. Individual returns may differ due to level and timing of activity in your account.

The MTA Stable Value Fund is an investment option that seeks to provide safety
of principal and a stable credited rate of interest, while generating competitive
returns over time compared to other comparable investments.
Investment Objective
Investment Strategy
The MTA Stable Value Fund, managed by Galliard Capital Management, is
primarily comprised of investment contracts issued by financial institutions and
other eligible stable value investments. All contract issuers and securities utilized
in the portfolio are rated investment grade by one of the Nationally Recognized
Statistical Rating Organizations at time of purchase. The types of investment
contracts in which the Fund invests include Separate Account GICs and
Security Backed Investment Contracts. These types of contracts seek to provide
participants with safety of principal and accrued interest as well as a stable
crediting rate.
Separate Account GICs are GICs issued by an insurance company and are
maintained within a separate account. Separate Account GICs are typically backed
by segregated portfolios of fixed income securities.
Security Backed Investment Contracts are comprised of two components: 1)
investment contracts issued by a financial institution and 2) underlying portfolios
of fixed income securities (i.e. bonds) whose market prices fluctuate. The
investment contract is designed to allow participants to transact at book value
(principal plus accrued interest) without reference to the price fluctuations of the
underlying fixed income securities.
MTA011813
The Stable Value Fund may be appropriate for someone seeking to safeguard
principal or balance a portfolio having more aggressive investments.
Investor Profile
Relative Risk
Conservative Moderate Aggressive
Money Markets Bond Funds Stock Funds
Stable Value
Fund Advisor
Galliard Capital Management is the Fundís Advisor. Galliard specializes in stable
value management and currently manages more than $85.2 billion in assets for
institutional investors



I'm thinking of allocating about 15%-20% of the fixed income portion of my portfolio to this fund to reduce volatility and improve risk-adjusted returns in my overall portfolio. However, I'm concerned that this stable value fund's returns do not seem to outpace inflation. Aside from cash, shouldn't every fund in one's portfolio have a real return over inflation?


FYI: I already hold total bond market and Vanguard TIPS (VIPSX) in my 401k/457b and Roth IRA, respectively.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
I wish my employer hadn't killed off the stable value fund they used to offer.  You get the stability of a deposit account with the yield of an investment grade intermediate bond fund.  What's not to like, especially when interest rates are at historic lows and the risk of principal losses from bond funds is elevated?

joer1212

  • Bristles
  • ***
  • Posts: 292
I wish my employer hadn't killed off the stable value fund they used to offer.  You get the stability of a deposit account with the yield of an investment grade intermediate bond fund.  What's not to like, especially when interest rates are at historic lows and the risk of principal losses from bond funds is elevated?

I had thought precisely the same thing, but the problem is that stable value funds don't keep up with inflation (it seems), so I would be paying a different price if I invested in one.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Lagging inflation is a fixed income problem, not a stable value problem.

Another Reader

  • Magnum Stache
  • ******
  • Posts: 4831
The stable value fund in my old 457 plan pays a little over three percent.  I kept a year's worth of expenses in that fund when I rolled the rest over to an IRA for better investment choices.  Since it is deferred compensation, I would only pay income taxes on a withdrawal.  Stable value funds are good because they pay bond fund yields with better security, if done right.  Most are annuity/GIC-backed, yours is a bit broader in composition.

I like them in 457 plans, because they can be emergency income if your circumstances change, or they can be stable sources of ER income.  I do not think they improve the overall yield of your portfolio vs. well selected equities and equity funds.

joer1212

  • Bristles
  • ***
  • Posts: 292
The stable value fund in my old 457 plan pays a little over three percent.  I kept a year's worth of expenses in that fund when I rolled the rest over to an IRA for better investment choices.  Since it is deferred compensation, I would only pay income taxes on a withdrawal.  Stable value funds are good because they pay bond fund yields with better security, if done right.  Most are annuity/GIC-backed, yours is a bit broader in composition.

I like them in 457 plans, because they can be emergency income if your circumstances change, or they can be stable sources of ER income.  I do not think they improve the overall yield of your portfolio vs. well selected equities and equity funds.

They may improve the "risk-adjusted" return, but I'm not even sure about that.
Everyone says that stable value funds' returns are like total bond fund, but if it was, I would be a fool not to use it in place of total bond fund, especially when it's much less risky. Who wouldn't?
I think that stable value funds lag total bond funds probably by 1%-2%. There is no way that svf have provided a free lunch to the extent that they offer the same returns as tbf.
« Last Edit: March 13, 2013, 06:47:44 PM by joer1212 »

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
The stable value fund in my old 457 plan pays a little over three percent.  I kept a year's worth of expenses in that fund when I rolled the rest over to an IRA for better investment choices.  Since it is deferred compensation, I would only pay income taxes on a withdrawal.  Stable value funds are good because they pay bond fund yields with better security, if done right.  Most are annuity/GIC-backed, yours is a bit broader in composition.

I like them in 457 plans, because they can be emergency income if your circumstances change, or they can be stable sources of ER income.  I do not think they improve the overall yield of your portfolio vs. well selected equities and equity funds.

They may improve the "risk-adjusted" return, but I'm not even sure about that.
Everyone says that stable value funds' returns are like total bond fund, but if it was, I would be a fool not to use it in place of total bond fund, especially when it's much less risky. Who wouldn't?
I think that stable value funds lag total bond funds probably by 1%-2%. There is no way that svf have provide a free lunch to the extent that they offer the same returns as tbf.

Over time, stable value funds should perform about equally to a high grade, intermediate term bond fund.  You get the yield without any capital gain or loss related to market value changes you would see in a bond fund.  The reason I like them in a diversified portfolio is that they are essentially a bond fund with a put that you can exercise any time you like.  If things go to hell in the bond market, you can put the SV fund to the issuer by selling your shares and go buy bonds or whatever else you like, and along the way you get a far higher yield than would otherwise be the case.  You can always manufacture a SV fund replacement yourself by buying a bond ETF and then buying a long dated put on it.

joer1212

  • Bristles
  • ***
  • Posts: 292
Quote
Over time, stable value funds should perform about equally to a high grade, intermediate term bond fund.  You get the yield without any capital gain or loss related to market value changes you would see in a bond fund.  The reason I like them in a diversified portfolio is that they are essentially a bond fund with a put that you can exercise any time you like.  If things go to hell in the bond market, you can put the SV fund to the issuer by selling your shares and go buy bonds or whatever else you like, and along the way you get a far higher yield than would otherwise be the case.  You can always manufacture a SV fund replacement yourself by buying a bond ETF and then buying a long dated put on it.

I see what you mean. In other words, over the long run, with interest rate spikes and dips, a bond fund's value would fluctuate, but in the end, would wind up with the same overall return as a stable fund.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Quote
Over time, stable value funds should perform about equally to a high grade, intermediate term bond fund.  You get the yield without any capital gain or loss related to market value changes you would see in a bond fund.  The reason I like them in a diversified portfolio is that they are essentially a bond fund with a put that you can exercise any time you like.  If things go to hell in the bond market, you can put the SV fund to the issuer by selling your shares and go buy bonds or whatever else you like, and along the way you get a far higher yield than would otherwise be the case.  You can always manufacture a SV fund replacement yourself by buying a bond ETF and then buying a long dated put on it.

I see what you mean. In other words, over the long run, with interest rate spikes and dips, a bond fund's value would fluctuate, but in the end, would wind up with the same overall return as a stable fund.

Pretty much.  Where a stable value fund shines is when things get ugly in the equity or (especially) the bond market.  Then you can pull money from the stable value fund, effectively sticking whoever guaranteed stable value with the losses, and go shopping for cheap stuff.  It is better than cash or a money market fund for this task because they generally yield a lot more while you wait for the next market event.

joer1212

  • Bristles
  • ***
  • Posts: 292
Quote
Pretty much.  Where a stable value fund shines is when things get ugly in the equity or (especially) the bond market.  Then you can pull money from the stable value fund, effectively sticking whoever guaranteed stable value with the losses, and go shopping for cheap stuff.  It is better than cash or a money market fund for this task because they generally yield a lot more while you wait for the next market event.

But don't most stable value funds have a 90-day waiting period where you first have to transfer the money you take out to an equity fund, before you can transfer it to another fixed-income option? It's their way of discouraging yield-chasing.

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Quote
Pretty much.  Where a stable value fund shines is when things get ugly in the equity or (especially) the bond market.  Then you can pull money from the stable value fund, effectively sticking whoever guaranteed stable value with the losses, and go shopping for cheap stuff.  It is better than cash or a money market fund for this task because they generally yield a lot more while you wait for the next market event.

But don't most stable value funds have a 90-day waiting period where you first have to transfer the money you take out to an equity fund, before you can transfer it to another fixed-income option? It's their way of discouraging yield-chasing.

Many do, but that is easily gamed.  In many cases you will want to buy equities with the money.  If you want to buy bonds and you already have an equity allocation in the account, buy the bonds with money from the equity position, then buy back the equities with the stable value money.

joer1212

  • Bristles
  • ***
  • Posts: 292
Quote
Many do, but that is easily gamed.  In many cases you will want to buy equities with the money.  If you want to buy bonds and you already have an equity allocation in the account, buy the bonds with money from the equity position, then buy back the equities with the stable value money.

Smart idea.