Stable Value Funds

[quigleydoor]

With the recent discussion of the risks of money market funds, I am taking a good look at the cash and short-term bond vehicles in my portfolio. I am most concerned about the two "stable value funds" I am holding in my 401(k) accounts.

Stable value funds are opaque. There used to be some publicly available mutual funds of this type, but these offerings all closed up shop by 2004. (source) There seems to be some unusual accounting practices involved, since mutual funds must be marked to market every night (fair-value accounting), while the securities in stable value funds are not liquid enough to mark (contract-value accounting). Stable value funds are still available in some 401(k) plans. In 2005 FASB reaffirmed that contract-value accounting was legit for retirement plan assets. (source)

There are occasional mentions of "wrapper agreements" in the marketing. I think these are used to synthesize marked-to-market prices on the illiquid contracts. Or perhaps "wrapper agreements" are the "guarantee" part of guaranteed investment contract. I have no idea, and this stuff is pretty boring to sift through.

So I turned to the fair and balanced reporting at the Stable Value Investment Association:

Stable Value Funds deliver safety and stability by preserving principal and accumulated earnings. They are similar to money market funds but offer considerably higher returns. Their returns make them comparable to intermediate bonds minus the volatility. They are the largest conservative investment in defined contribution retirement plans with over $396 billion in assets.

I hold one run by SSgA. The prospecto-blurb which is available on the web talk about "high quality investment contracts" issued by financial institutions, "as well as short-term investment products". 86% of issues held are AA+ or higher. The same portion is concentrated in only 4 issuers: UBS AG (Syn.), Royal Bank of Canada, Monumental Life Insurance Co, and Bank of America NA.

My wife has one run by Invesco. 95% of issues are AA of higher. Oddly enough this fund is concentrated in 2 the 4 issuers I listed above.

Hmm. Any insights into the nutritional value of this sausage recipe?

[Jim Nickerson]

Re: Stable Value Funds

I know nothing about the issue of stable value funds. This thread and EJ's mention of the stability of MM funds on another thread prompted me too, to look at my short-term bond fund--which incidentally has sunk like a rock in the past month compared to its generally stable past.

About 25% of its holding are below A credit ratings, and ~14% are BB, B or not rated (5.77%), and the average maturity of the fund as of 7/31/07 was 6 months. It has lost 1% of its NAV in 18 market days with 60% of that decrease being in August.

It seems that short term T-bill rates (1 mo - 1 year) have all diminished since 7/31/07--which would have made T-Bill more valuable.

It strikes me that the explanation for this short-term loss of 1% of NAV must be due to some of the more lowly rated bonds turning relatively to shit in the past 3 weeks.

Might there be some better explanation for what has happened?

Edit: It also occurs to me if there is yet to a lot of unraveling of all the credit mess, that such losses in a heretofore relatively stable short-term fund may accelerate even more.

[c1ue]

Re: Stable Value Funds

Jim,

I can't comment on the safety of the funds in question.

However, I can say that if your money moves out, then you are forcing a 'mark to market' which is going to be ugly given the present situation.

As bad as it looks now, the reality is that we are in a credit crunch. This is so far perception based, but certainly could turn into reality.

However, the reality will take years to unfold.

At present everyone is assuming the worst.

I happen to think the worst at present is not necessarily the worst it could be - at least for certain areas - but it does not mean that this perception cannot pass on before the actual reality shows up.

Besides which, unless you really are taking it all out in cash and/or buying physical assets with it, there is not much you can do else.

[DemonD]

Re: Stable Value Funds

The vanguard stable fund has 34% bonds backed by GNMA - that's ginnie mae MBS.

Yes, I am quite freaked out and I feel like I have no where to run within my portfolio. I also fear that many of my co-workers, who, being conservative and also seeing an economic downturn, have also gone to stable and we all are going to get fucked.

Out of all the bearishness that gets bandied around on itulip and a lot of other sites, I've never truly felt an actual fear gripping over my portfolio.

I've considered going to the Total Bond Market Index but that has a lot of MBS too.

I'm considering moving most or all of my stable funds into the Wellington fund which is 2/3 large value companies and 1/3rd bonds (with much less % of MBS).

I really wish everyone got a self directed 401k grrrrrrr.

[Rajiv]

Re: Stable Value Funds

Latest News:

Sentinel Management Group has asked permission from the CFTC to halt money market redemptions.

[BRIEFING.COM] The market continues to deteriorate as speculation about a letter to clients from a money market fund halting redemptions is confirmed. Within the last 10 minutes, CNBC reported that Sentinel Management Group has asked permission from the CFTC to halt money market redemptions.

Sentinel's inability to meet significant redemption requests has exacerbated the liquidity concerns that have led many to believe a real credit crunch is forthcoming. As a result, the Financial sector has edged even lower and is now down 1.5% to act as the bottom continues to fall out of the brokers and banks.

[DemonD]

Re: Stable Value Funds

Okay I double checked vanguard's stable fund, and I'm a little more at ease, for 2 reasons:

1. GNMA MBS are guaranteed by the US government.
2. The vanguard stable fund is insured by Met Life to guarantee a 3% return to investors and to maintain it's principle.

I am fortunately holding nothing in any other MM account, all of my brokerages I've made sure I'm either in a stock equity or my cash is with my bank.