What is this investment ?

[Delawaredave]

My 401K with Megacorp has the following fund description below. Looking please for opinions how to "count" this in my portfolio - as a CD or bond or ? At the bottom are the 1,5,10 year returns.

If someone's looking for a 25% "bond component" in their portfolio, would money in this account count as "bond" or "cash" ?

An advisor told an associate of mine to use this fund as their bond portion - I'm not sure this is correct - as the level of return and deviation of return doesn't "behave" as a bond.

Fund Objective: The Fund seeks to preserve capital (original and subsequent investment) while providing relatively stable returns.

Portfolio Concept: the Fund's manager, seeks to provide steady returns by investing in stable value investment contracts under arrangements with various financial institutions.* These investments incorporate book value accounting, which smooths out the effects of fluctuations due to market value changes of securities contained in the Fund's portfolio. A portion of the Fund (current savings plus proceeds from maturing contracts less any loans, transfers and withdrawals) may be invested throughout the year in new stable value investment contracts at then-current interest rates. This produces a weighted average (i.e., blended ) interest rate, which may vary daily depending on the flow of cash into and out of the Fund. Over time, the Fund's return is expected to exceed the returns on bank savings accounts and money market funds. The Fund is designed for investors who:

Ytd 5.07%
1 year 5.59 %
5 years 5.52 %
10 years 6.32 %

 

[brewer12345]

Roughly equivalent to a CD. The underlying investemnts are very high quality "stable value contracts" issued by an insurace company (or sythetic versions of the same).

 

[gindie]

Sounds like a "Stable Value Fund". I classify these as a Money Market in my portfolio. They usually attempt to maintain a $1 per share value.

I use it as an alternative to bonds when I think that interest rates will rise (thereby causing bond total returns to fall).

 

[MikeK]

I consider these Cash. Right now I'm using my Stable Value Fund instead of Bonds. It keeps a stable value, is giving very competitive rates (high 4%) and is a good place to minimize risk in a rising interest rate marketplace.

 

[Delawaredave]

Thanks for responses ! I think they buy "GIC"s - which I think are Guaranteed Investment Contracts that insurance companies sell ?

I'll consider as CDs/cash.

Thanks again.

 

[jazz4cash]

Thanks for responses ! I think they buy "GIC"s - which I think are Guaranteed Investment Contracts that insurance companies sell ?

I'll consider as CDs/cash.

Thanks again.

We had a GIC option in our plan years ago........Now its called "the income fund". I understand the term "guaranteed" was considered to be a liability and/or misleading, so the current term is "stable value". Im gonna re-read my info, but I thought these were "as safe as" a MM, even without the guarantee.

 

[brewer12345]

We had a GIC option in our plan years ago........Now its called "the income fund". I understand the term "guaranteed" was considered to be a liability and/or misleading, so the current term is "stable value". Im gonna re-read my info, but I thought these were "as safe as" a MM, even without the guarantee.

Yeah, think MM or short term CD with these things.

These funds used to be full of GICs issued by insurance companies. Highly rated (often AA) paper with the standing of a policyholder if the commode hit the windmill and squeaky clean credits. Nowadays, they have some GICs, but the bulk of the assets are what is knoown as "synthetic GICs." If you really care, I can explain the structure, but it amounts to the same thing.

 

[jazz4cash]

I probably would not understand the mechanics, but what is compelling to me is the long-term return (6.32~10yrs) on DelDave's fund is actually better than nearly any MM fund or CD without doing some laddering or other gyrations. My fund is almost as good as Dave's, so I've often wondered what they're doing to stretch the return, or maybe it really is riskier than the MM/CD

 

[brewer12345]

I probably would not understand the mechanics, but what is compelling to me is the long-term return (6.32~10yrs) on DelDave's fund is actually better than nearly any MM fund or CD without doing some laddering or other gyrations. My fund is almost as good as Dave's, so I've often wondered what they're doing to stretch the return, or maybe it really is riskier than the MM/CD

The underlying is longer term stuff than you would see in a MM (by years). The fund managers/insurers are counting on the fact that plan participants generally don't pull the money out short term even though they could.

 

[jazz4cash]

thanks, Brewer........that was the answer I was hoping to hear.