I am reading that "stable value" funds produce a higher yeild than 3-mo T-bills and perhaps better than most intermediate term bonds. On top of this, the NAV is stable at $10/share. I don't recall seeing any analysis of how this class of income fund would fit into an allocation plan. Does anyone have any information on how this type of fund would affect the maximum withdrawal rate?
Stable Value Funds
- Thread starter rwwoods
- Start date
I found a great source of information at
http://www.stablevalue.org/default.asp
Included at the site are the following.
Comparison of TIPS and Stable Value
http://www.stablevalue.org/library/vol7issue1/part1.asp
Assent Allocation and Stable Value
http://www.stablevalue.org/library/articles/AssetAlocMod9-4-01.asp
Calculators
http://www.stablevalueillustrations.org/calculators/stablevalue/index.html
http://www.stablevalue.org/default.asp
Included at the site are the following.
Comparison of TIPS and Stable Value
http://www.stablevalue.org/library/vol7issue1/part1.asp
Assent Allocation and Stable Value
http://www.stablevalue.org/library/articles/AssetAlocMod9-4-01.asp
Calculators
http://www.stablevalueillustrations.org/calculators/stablevalue/index.html
I am suspicious of these things. I poked around in the web site you posted. The "stable value" is thanks to an "insurance wrapper". This means that some of the yield is given up to the entity that provides the guarantee.
Sounds to me like something cooked up for brokers to sell to bubble busted investors. These funds look to be short to intermediate bond funds with some extra fees for a stable value "guarantee" plus some more extra fees for the soothing sales pitch. Nothing will go wrong because our clever financial engineers have bought some derivatives and besides Joe's offshore insurance will bail us out if things go wrong.
http://www.stablevalue.org/help/slide6.asp shows their graph of the contents of the average stable value fund. What catches my eye here is that half the portfolio is in "Synthetics" aka derivatives. Derivatives have their uses but a lot of toxic waste is created by the financial engineering process and it has to be parked somewhere. Where better to park the unsalable tranches than in a product marketed to risk adverse individuals. Think of a sausage made in southern China, guaranteed to be safe by the manufacturer.
If Vanguard were to offer one I might look closer at it. Otherwise my take is that these are going to be high fee, lower performing (because of the fees) vehicles. There is a reduced risk of moderate loss but at the risk of catastrophic loss if the sponsors aren't as clever as they think they are.
The value of any fixed rate instrument varies as interest rates change. You can pretend it isn't happening by buying CD's or individual bonds and holding to them maturity. But the bottom line is that when interest rates go back up, those holding low interest rate paper will be hurt.
Regards,
Baanista
Sounds to me like something cooked up for brokers to sell to bubble busted investors. These funds look to be short to intermediate bond funds with some extra fees for a stable value "guarantee" plus some more extra fees for the soothing sales pitch. Nothing will go wrong because our clever financial engineers have bought some derivatives and besides Joe's offshore insurance will bail us out if things go wrong.
http://www.stablevalue.org/help/slide6.asp shows their graph of the contents of the average stable value fund. What catches my eye here is that half the portfolio is in "Synthetics" aka derivatives. Derivatives have their uses but a lot of toxic waste is created by the financial engineering process and it has to be parked somewhere. Where better to park the unsalable tranches than in a product marketed to risk adverse individuals. Think of a sausage made in southern China, guaranteed to be safe by the manufacturer.
If Vanguard were to offer one I might look closer at it. Otherwise my take is that these are going to be high fee, lower performing (because of the fees) vehicles. There is a reduced risk of moderate loss but at the risk of catastrophic loss if the sponsors aren't as clever as they think they are.
The value of any fixed rate instrument varies as interest rates change. You can pretend it isn't happening by buying CD's or individual bonds and holding to them maturity. But the bottom line is that when interest rates go back up, those holding low interest rate paper will be hurt.
Regards,
Baanista
The comparison charts also add a 39 basis points reduction on the bond index, supposedly to simulate fees on a mutual fund. If you use a lower cost fund such as those offered by Vanguard index funds, the intermediate bond returns over time look much better than the higher cost stable value fund. Still, they are right that bonds are volatile. It is better to buy them when interest rates are comparitively high. The last good time to buy bonds was in 2000. Buying a bond mutual fund when rates are high maximizes the odds of being able to later sell shares of the fund at the same or higher prices. Rates are very low right now, and mutual fund prices are very high. Buying a bond fund now carries a high risk of taking a capital loss when you eventually sell the fund shares.
Baanista's comments are an excellent example of the rational skepticism that investors should apply when evaluating "financial products" that allegedly provide some unique benefit.
A basic principle of economics is that "there is no such thing as a free lunch." In the financial branch of economics, this translates into the principle that "the only way to achieve a higher probable return is to accept a greater risk of loss" (especially short-term). The flip side of this principle is that if you want "stable value," you must accept a lower rate of return. Thus, any "financial product" that promises both "stable value" and a rate of return higher than the interest rate on Treasury Bills almost certainly has hidden risks.
It takes a combination of salesmanship by "financial professionals" and gullibility by investors to buy "financial products" that don't offer the safety, liquidity, and rate of return available by simply buying U.S. Treasury securities. And as I have said repeatedly, nothing offers a better guarantee of "stable value" (better yet -- modestly-increasing value) in real, inflation-adjusted terms, than TIPs.
No, I'm really not Alan Greenspan or John Snow
.
A basic principle of economics is that "there is no such thing as a free lunch." In the financial branch of economics, this translates into the principle that "the only way to achieve a higher probable return is to accept a greater risk of loss" (especially short-term). The flip side of this principle is that if you want "stable value," you must accept a lower rate of return. Thus, any "financial product" that promises both "stable value" and a rate of return higher than the interest rate on Treasury Bills almost certainly has hidden risks.
It takes a combination of salesmanship by "financial professionals" and gullibility by investors to buy "financial products" that don't offer the safety, liquidity, and rate of return available by simply buying U.S. Treasury securities. And as I have said repeatedly, nothing offers a better guarantee of "stable value" (better yet -- modestly-increasing value) in real, inflation-adjusted terms, than TIPs.
No, I'm really not Alan Greenspan or John Snow
.Mr._johngalt
Thinks s/he gets paid by the post
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As conservative as I am, TIPs wouldn't work for me.
I ned to maximize my monthly income stream and am not
too worried about inflation. I figure I'll deal with it when and if it comes back. I may be dead by then, and most of the things we worry about never happen anyway.
I ned to maximize my monthly income stream and am not
too worried about inflation. I figure I'll deal with it when and if it comes back. I may be dead by then, and most of the things we worry about never happen anyway.
I agree that a healthy dose of skepticism is needed. Stable value funds have existed in one form or another for a reasonable period of time - they are not new. You will most likely find one offered by your 401k or similar retirement plan. They were first offered by insurance companies in the form of guaranteed income contracts (GIC) where the principle was insured. Later, mutual fund companies got in on the action by offering short to intermediate bonds that were "wrapped" by insurance companies. These funds have a history of providing an increased yield over money market funds and 3-month T-bills. The price you pay for the wrapper is about 0.25% in added fees (about 1% total). All of these funds were only offered via retirement accounts until recently, but now several are offered to IRA accounts. Below are two articles from Morningstar that point out the attributes a good fund should have.
http://news.morningstar.com/doc/news/0,,85591,00.html?bondcsection=moreInfo13
http://news.morningstar.com/doc/news/0,,91306,00.html
Morningstar also reports that the SEC is investigating certain aspects of Stable Value funds.
http://poweredby.morningstar.com/PoweredBy/doc/news/1,3496,88850,00.html?CN=RMD003
In the end, it appears that a good Stable Value fund is a good alternative to the yields of money market funds, CDs, T-bills, and short-term bond funds. But are they a better alternative than intermediate term bond funds or TIPs? Based upon data from 3/97-12/02 provided by the Stable Value Investment Association (SVIA), I plotted the Efficient Frontier for a mix of S&P500 with Stable Value, TIPs and the Lipper Aggregate index. For that time period, TIPs was the clear winner followed by the Lipper index and with Stable Value in a clear last place. Plotting data from 1985-2002 provided by SVIA for Stable Value, 3 mo T-bills and the Lipper Intermediate index found that the index was the clear winner and with Stable Value in second place. The problem with all of this data, as pointed out by William Bernstein in his book "The Intelligent Asset Allocator", is that plotting of the Efficient Frontier will change depending upon the period taken for the data. One need several decades of data to gain a reasonable belief in the results. Unfortunately, we don't seem to have several decades of data for Stable Value funds, so the jury is still out on the long-term results against intermediate term bond funds and TIPs.
http://news.morningstar.com/doc/news/0,,85591,00.html?bondcsection=moreInfo13
http://news.morningstar.com/doc/news/0,,91306,00.html
Morningstar also reports that the SEC is investigating certain aspects of Stable Value funds.
http://poweredby.morningstar.com/PoweredBy/doc/news/1,3496,88850,00.html?CN=RMD003
In the end, it appears that a good Stable Value fund is a good alternative to the yields of money market funds, CDs, T-bills, and short-term bond funds. But are they a better alternative than intermediate term bond funds or TIPs? Based upon data from 3/97-12/02 provided by the Stable Value Investment Association (SVIA), I plotted the Efficient Frontier for a mix of S&P500 with Stable Value, TIPs and the Lipper Aggregate index. For that time period, TIPs was the clear winner followed by the Lipper index and with Stable Value in a clear last place. Plotting data from 1985-2002 provided by SVIA for Stable Value, 3 mo T-bills and the Lipper Intermediate index found that the index was the clear winner and with Stable Value in second place. The problem with all of this data, as pointed out by William Bernstein in his book "The Intelligent Asset Allocator", is that plotting of the Efficient Frontier will change depending upon the period taken for the data. One need several decades of data to gain a reasonable belief in the results. Unfortunately, we don't seem to have several decades of data for Stable Value funds, so the jury is still out on the long-term results against intermediate term bond funds and TIPs.
