You've read this lament before: Savers in this low-rate environment are suffering, much like crash dieters at holiday dinners.
The higher returns of riskier investments loom like chocolate-pecan pie topped with bourbon-vanilla ice cream.
Stable value funds
Annualized returns for stable value funds have consistently beaten money market funds.
Stable value fund returns
1-year return: 3.12%
3-year return: 3.70%
5-year return: 4.15%
Money market fund returns
1-year return: 0.20%
3-year return: 1.25%
5-year return: 2.66%
Note: Returns are annualized through Oct. 29, 2010.
Sources:
Hueler Analytics Inc.; Citigroup 6-month Treasury Bill Index
But memories of that 2008 market nose dive keep many of us seated at the table, picking over the vittles.
Those of you saving through a workplace retirement plan might have access to a better option: a stable value fund. They indeed are a safe place for soon-to-be retirees to park money they'll soon need. But like any investment, they're not risk free.
These funds, offered in defined-contribution retirement plans such as 401(k)s and 457s, provide higher returns than money market funds without the ups and downs of bond funds.
Through October, stable value funds generated a 12-month rolling return of 3.12 percent, according to
, a Minneapolis-based independent data and research firm. Over five years, they've returned 4.15 percent annually, on average.
Investors took note and flocked to the funds in late 2008, boosting investments in 27 large stable value funds by 27 percent, according to the
, a trade group.
"It's hard to find a better stress test than what happened in the last couple of years," said Timothy Stumpff, president of
in Portland, one of the nation's largest stable-value fund managers with $14.3 billion in assets. "This product did what it was designed to do."
But what are these funds? How stable is stable? How can anything returning 3 percent in this low-rate environment live up to its promise? What happens if interest rates jump?
First, know that stable value funds aren't available to retail investors. IRA holders are out of luck. They also aren't ideal for young, long-term investors who can take on more risk to increase returns.
Stable value funds invest money in short-term, high-quality bonds. They also invest in money-market funds and insurance contracts that pay a fixed-income stream.
Those investments are then wrapped with insurance from banks and insurance companies. These insurance contracts, the "wrappers," protect investors if the values of the fund's fixed-income holdings fall below the amount of money investors have plunged into the fund.
This backstop allows fund managers to reach for higher returns through bonds that are a bit riskier than the securities found in money markets. The funds generally guarantee investors can withdraw all the money they invest, except in certain circumstances.
Those circumstances can include bankruptcies or mass layoffs by your employer or plan provider. Unfortunately, they're often buried in the fine print of disclosures.
For simplicity's sake, stable value funds sell shares at $1 apiece, just like money market funds. The underlying value of some stable value funds dipped below $1 a share in late 2008, just as some money market funds did when they "broke the buck." Stable value funds have since recovered and continue to outperform money markets.
Similar problems could resurface again in another crisis, or if interest rates surge. So, here are some of the markers and risks to consider with these funds:
No insurance.
Money market accounts at banks are insured up to $250,000 by the federal government. Money markets in brokerage accounts are not. Neither are stable value funds.
Market value/book value ratio.
This is a figure to keep an eye on. It's a good sign of current health of the fund.
It represents the difference between the value of the investments held by the fund and the total amount of money investors have sunk into the fund. If this ratio is 100 percent or above, the fund can meet investor withdrawals on its own.
If it falls below, the fund's holdings are worth less than its obligations, and the insurance would have to kick in if investors suddenly demanded all their money. At the end of 2008, the average fund ratio dropped to 95 percent, according to Hueler. It's back up to 103 percent, on average, a healthy ratio.
Rapid interest-rate changes.
Rates are about as low as they can be. But if they jump rapidly, the value of the fund's investments would decline.
That would cause the market-to-book-value ratio to drop. But a spike isn't expected to happen anytime soon, and it's likely fund managers could navigate through it over a couple of months. That wouldn't necessarily be the case for a bond fund, whose lower value would immediately be reflected in the trading price.
"If you're invested in a mark-to-market bond fund, you're going to feel that pain right away," said Susan Graef, who oversees The Vanguard Group's stable-value offerings. "In that case you might be better in a stable value fund."
Restrictions.
If interest rates spike, investors might try to withdraw money quickly to chase bond or money-market funds that suddenly pay higher returns. For this reason, stable value funds impose an "equity wash" provision. It usually requires investors to exchange into a stock fund for 90 days before exchanging into competing money-market or short-term bond funds.
Other funds might also prevent you from withdrawing all your money in, say, one year. If you expect to need the money soon, ask your plan sponsor about the fund's restrictions before you invest.
Bottom line:
I don't write this column to warn you off these funds. They've never had a losing month since their inception in 1973,
by University of Pennsylvania finance and insurance professor David Babbel.
"I'd rather see people investing in that than what I see people doing, which is buying intermediate- and long-term bonds or chasing yields," said Paul Vermilya, president of Compass Investment Advisers in Portland.
Just know that, like anything in investing, it's not a good idea to put all your money in one type of asset.
Even dieters shouldn't stick to one dish.
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