This publication intends to refresh the basics around the role and structures of stable value funds, before going into the details of industry trends we have been observing for over a decade. Following the financial crisis in 2008, there were some questions about the role stable value would continue to play as a capital preservation option in defined contribution plans. A few managers and wrap providers exited the business, while the remaining wrap providers increased fees to cover the additional perceived risk. Since that time, the industry has evolved to find positive equilibrium between managers and wrap providers in areas such as wrap fees, capacity, investment guidelines and contract terms. This has led to narrowing dispersion within crediting rates and market-to-book ratios. One thing that has remained constant during this time is the tight duration range in which most firms manage their strategies.
From a sector allocation standpoint, the low interest rate environment has led many managers to reduce their government bond allocations in favor of investment grade corporate bonds and high-quality securitized assets. This has resulted in a greater allocation within the industry to A and BBB rated bonds. However, the slightly higher credit risk is somewhat offset by managers focusing on the higher quality issues within those two buckets.
Overall, relative to where things stood following the 2008 financial crisis, the stable value asset class was in a healthier position entering this year prior to the market volatility in the spring and remains so today. PEI was in regular discussion with all of the leading managers in the industry and didn’t observe any issues with their strategies due to the market conditions. PEI believes stable value remains a solid capital preservation option within defined contribution plans.