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					                Stable Value Mutual Funds Continue to Enjoy Strong Growth

                                        By Randy Myers



John Axtell, Managing Director at Deutsche Asset Management and Head of its Stable Value
Management Group, has a problem any money manager would welcome: investors desperately
want his product. Specifically, they want the Stable Value mutual fund his firm manages for the
IRA marketplace. Assets in Stable Value mutual funds, which debuted just several years ago,
have skyrocketed from $300,000 at the end of 2000 to $5.64 billion as of September 30, 2003.

Addressing the SVIA’s 2003 National Forum, D.C., Axtell recalled a meeting with the chief
investment officer of a financial advisory firm who complained of a problem with Deutsche’s
Stable Value mutual fund. The problem, Axtell was relieved to hear, was that some of the
advisory firm’s clients were insisting on putting all of their money into the fund, despite the
conventional wisdom against putting all of your eggs in one basket. In some cases, they were
threatening to find a new advisor if their current advisor would not heed their wishes.

Axtell said the response of IRA investors to Stable Value mutual funds has been enthusiastic
despite a number of potentially negative developments, including rebounding equity markets, a
recent rise in interest rates, the potential of paying a redemption fee to take money out of the
funds under certain market conditions, and news that the Securities and Exchange Commission
is reviewing the way the mutual funds account for the value of the wrap contracts that are key to
their book-value guarantee, or stable net asset value.

Some managers of Stable Value mutual funds have also reported bumping up against capacity
constraints in the wrap market, not so much because there is not enough capital available to
issue contracts, but because some wrap providers have been reluctant to venture into the mutual
fund arena. “We see different risks in mutual funds than in the 401(k) market,” explained Jon
Fraade, Managing Director at AIG Financial Products, a subsidiary of American International
Group that sells wrap contracts for Stable Value investment products, including two mutual funds.
Wrap issuers are concerned that such funds have not been tested in a rising interest rate
environment and that during such periods money will flow out of the funds as investors seek
higher returns in other investment products. James McDevitt, Senior Vice President and Stable
Value Product Manager at State Street Bank & Trust Co., also noted that on the institutional side
of the market, cash inflows to Stable Value funds are fairly steady since most investors contribute
to them through automatic payroll deduction programs. That sort of cash-flow certainty does not
exist in the IRA market.

All that said, Stable Value mutual funds continue to grow rapidly, and despite the big gains they
have made in attracting assets, Axtell said it would be a mistake to believe they are anywhere
near reaching their growth potential. The overall market for conservative IRA investments in
mutual funds is approximately $279 billion, he said, reflecting the $164 billion held by money
market funds in IRA accounts and the $115 billion held in bond mutual funds.

Demographics also suggest that Stable Value mutual funds have huge potential, agreed Fraade,
since the first wave of the vast baby boomer generation is now closing in fast on retirement age.
While AIG has been a cautious participant in the new Stable Value mutual fund marketplace—
and some wrap issuers have stayed out altogether thus far—he predicted that as the funds get
larger and more diversified, additional wrap capacity will materialize throughout the industry.
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