PLANADVISER - January February 2014

52 | planadviser Stable value funds, an essential but somewhat over- looked asset class, offer reasonable returns, low risk and bedrock value. Especially in light of today’s market volatility, they can help shield a portfolio from outsized returns on both the upside and the downside.

But perhaps the timelier consideration regarding stable value funds for 2014 is how they might perform in a rising rate environment. With many experts predicting that the Federal Reserve will pull back on monetary easing this year, rising interest rates will be a key concern for stable value investors.

Available only within defined contribution (DC) plans, stable value funds generally comprise high-quality, diversified fixed-income portfolios. However, unlike bonds, stable value funds are protected against rate volatility by wrap contracts from banks and insurance companies.

These wraps preserve an investor’s capital even in a rising yield environment, explains Craig Russell, head of the Americas institutional business of Goldman Sachs Asset Management in New York.

“Many investors believe that when the Federal Reserve
begins tapering its large-scale asset purchase program—
also known as quantitative easing—interest rates will rise,”
Russell says. “Since stable value funds invest in fixed-
income securities, which generally decline in value during
a rising rate environment, some may assume that tapering
will adversely affect stable value funds. We do not believe
this is likely.”
In fact, Russell says, gradually rising interest rates
stand to benefit stable value investors. Since the wrap
contracts help to preserve capital, higher interest rates
allow new cash to be invested at higher yields, which
he expects will provide a return benefit to stable value
investors over time.

“However, if interest rates move sharply higher over a short time, this will adversely affect bond funds and could also adversely affect stable value fund yields and returns,” he says.

“Dramatically rising rates, like inflation, aren’t good for a whole host of investments,” agrees Nick Gage, senior director and head of stable value separate account management at Galliard Capital Management in