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					     Important Reminder!!!
Be sure to sign the “Sign-In/Sign-Out”
   sheet outside of the room when
  applying for Continuing Education
Credits for the following certifications.
 (Check the appropriate certification)
              •CFA
              •CFP
              •CPE
          Stable Value Funds
Moderator:
Polly Scott, State of Wyoming
Panel:
Anthony Camp, ING
Chris Tobe, NEPC
Michael Wyatt, T. Rowe Price Associates, Inc.
Stable Value 101


      Tony Camp, CEBS
        Vice President
ING Stable Value Product Group
            What is Stable Value?
A Stable Value Fund is a conservative investment vehicle.
It seeks to provide a stable rate of return. Stable value
investments earn interest income comparable to that of
intermediate term, high-quality fixed income securities,
with a lower risk for loss of principal.

The primary objectives of a Stable Value Fund are:
   Preservation of Principal
   Competitive Returns
   High Liquidity
         Two Components Drive
   Engine
             Stable Value
  Underlying
Bond Portfolio




                           Transmission
                          Book Value Wrap
 Individually actively managed        The book value wrap allows for preservation of
                                         principal and provides stable crediting rate
  portfolio of high-quality, fixed                            
        income securities            The wrap contract smoothes market volatility by
                                     amortizing gains and losses over the duration of
                                                         the portfolio
                                                              
                                        This smoothing is triggered through the rate
                                      reset mechanism and insulates against day-to-
                                                         day volatility
            Stable Value
              Portfolio                  Asset
                                                                                              Falling
                                                                                             interest
                                         Value      Market Value                               rates
                                                    of underlying
                                                       portfolio



               Wrap
                                                                                   Rising
                                                                                  interest
                                                                                    rates
“Book Value Wrap” or guarantee
                                                                    Time
                                      Wrap Value   – Book Value – Mark et Value
              Stable Value Overview
   Stable Value as an asset class can be found in most 401(a),
    457 and 403(b) Plans
   Many different flavors of products - different regulations
    govern structure of product within each market
   Products have different levels of guarantees
   The stronger the guarantees, the higher the overall cost to the
    insurer and participant
   Underlying assets primarily invested in Fixed Income
    Securities
Stable Value Product Manufacturers
    Insurance Companies
    Banks
    Mutual Fund Providers
    Stable Value Managers
    Defined Contribution Full Service
     Providers
 Product Type            Other Names                  Issuer/Provider

                    IPG, Fixed Account, Fixed
General Account                                     Insurance Companies
                              Fund

   Guaranteed
                      GIC, BIC, GAC, BAC         Insurance Companies, Banks
Interest Contract

 Pooled Stable       Pooled GIC, Collective     Banks, Investment Management
  Value Fund          Trust, Pooled Fund                    Firms

Separate Account
                    SAGIC, Separate Account          Insurance Company
      GIC

                                                Insurance Companies, Banks,
 Synthetic GIC          S-GIC, Synthetic
                                                  other financial guarantors

  Stable Value
                     Discretionary Manager              Various firms
    Manager
        Stable Value Product Timeline
1930 Defined Benefit plan liabilities funded through insurance company
     general account
1974 Birth of Defined Contribution Plans - "IPG" General Account key
     investment option
1980 Birth of Insurance Company issued Guaranteed Investment Contracts
     Insurers innovate "IPG" general account stable value products
     Birth of Pooled Stable Value Funds
1987 Birth of Bank issued Guaranteed Investment Contracts (BICS)
1990 Birth of "Synthetic" and "Separate Account" GICs
1991 Stable Value Manager firms initiated
1997 First Stable Value Fund becomes registered "40 Act Fund“
2003 SEC eliminates registration for stable value funds
2006 DC Investment Options with Guaranteed Minimum Withdrawal Benefits
Size of the Stable Value Market
 (in billions)                               12/31/2006   12/31/2007

 Life Company Full Service                        $92          $97

 External Management
                                                  189          195
 (SV Manager)
 In House Management
 (managed by affiliates of                          12           13
 Plan)
 Bank and Investment
                                                  120          111
 Company Pools

 Total Stable Value Assets                       $413         $416

 Source: SVIA 12th Annual Survey (6/24/08)
    Stable Value Benefits Participants!

The Benefits of Using A Stable Value Fund
   Potential for Returns Higher than Money Market
    Funds with Risk Lower than a Bond Fund
   High Credit Quality and Issuer Diversification
   Principal Preservation is Number One Objective
Stable Value Investing Considerations
Stable value investing may be an ideal investment for:

   Retirees or individuals nearing retirement who will begin to
    access retirement funds now or in the near future.

   Conservative investors who seek a core portfolio component that
    may provide an attractive return coupled with the opportunity for
    low volatility and preservation of capital.

   Moderate or aggressive investors seeking diversification to
    enhance their overall portfolio risk-adjusted returns.

   An investment alternative to money market funds and short-term
    bond funds.
                 Stable Value Trends
   Trends
     Target Fund Explosion DOL exclusion of Stable Value as a
      QDIA - Causing change in plan default option
     Younger employees/new plans - Equity investors
     Boomers - Leave $$ in plan
     2008 Cashflow - QDIA excludes Stable Value - Participant
      flight to Stable Value
   Percent of Plan Assets
     1980’s - 30% - 60%
     1990’s - 20% - 40%
     2000+ - 10% - 30%
STABLE VALUE: “WEATHERING THE
           STORM”



                 Michael J. Wyatt
  Head of T. Rowe Price Stable Asset Management
STABLE VALUE – BUILT FOR SMOOTH SAILING




                  3
WHAT HAPPENS WHEN THE SEAS TURN STORMY?




                  5
   THE JOURNAL OF WALL STREET

                    Oil reaches
Stock market
                    all time high
in decline

                Fed concerned about
Credit          inflation
Markets in
Turmoil         (and low growth rate)


Corporate
               Consumer Confidence Low
Profits Down


               Economy in Depression
STABLE VALUE STORM CLOUD INFLUENCERS
                     Regulatory
                    Considerations




                   Cash Flow Activity



“Problem” Assets
                REPRESENTATIVE STABLE VALUE
                 ACCOUNT MONTHLY CASHFLOW

 6.0%                                                                       1600
 4.0%
                                                                            1400
 2.0%
 0.0%                                                                       1200
-2.0%
                                                                            1000
-4.0%
-6.0%                                                                       800
    Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

   Representative stable value acct cashflow (Left Axis)   S&P 500 (Right Axis)
                                 SINCE JUNE OF 2006, THE FED HAS
                               LOWERED RATES BY 325 BASIS POINTS
                       12


                       10                                      Nominal Fed Funds Rate


                       8
         Percent (%)




                       6


                       4


                       2


                       0
                       04/88   04/90   04/92   04/94   04/96     04/98     04/00        04/02   04/04   04/06   04/08


Sources: Bureau of Economic Analysis, Federal Reserve Board and Haver Analytics
         STABLE VALUE – ANNUALIZED YIELDS
                   (As of 6/30/08)

                                 Lipper Money Market Index
                                 Lehman Brothers U.S. Aggregate Index
                                 Representative Stable Value Account

 8%
 6%
 4%
 2%
 0%
      6       7       8       9       0       1       2       3       4       5       6       7       8
  n-9     n-9     n-9     n-9     n-0     n-0     n-0     n-0     n-0     n-0     n-0     n-0     n-0
Ju      Ju      Ju      Ju      Ju      Ju      Ju      Ju      Ju      Ju      Ju      Ju      Ju
BOOK VALUE WRAPPER – A PORTFOLIO LIFE PRESERVER




                   Fixed Income
                      Portfolio
STABLE VALUE SUCCESSFULLY WEATHERS THE STORM




                    3
The use of Stable Value in
Lifecycle & Lifestyle Plans




      Chris Tobe, CFA, CAIA
       Senior Consultant
              NEPC
                                                     Lifestyle plans ?
    • SV has superior risk and return
      characteristics to other fixed income
      allocations
              – Higher returns than money market*
              – Similar returns but lower volatility to bond funds
              – SV’s lower correlation to equities compared to other
                fixed options reduces overall volatility


*A Closer Look at Stable Value Funds Performance By David F. Babbel of the Wharton School and Miguel A. Herce, September 18, 2007
http://w ww.stablevalue.org/A%20Closer%20Look%20at%20Stable%20Value%20Funds%20Performance.pdf
                         Stable Value Performance




http://www.hueler.com/
                  Babbel Study
• Study by Wharton Professor David Babbel was
  commissioned by Stable Value Investment
  Association
• While there is not enough history for actual results
  the Babbel study modeled stable value in balanced
  portfolios
• They found that stable value was superior in
  investment risk and return characteristics to both
  money market and bond funds
• Conclusion is that Lifecycle and Lifestyle funds with
  stable value are superior to those using other fixed
  income options
                A Closer Look at Stable Value Funds Performance By David F. Babbel of the Wharton School and Miguel A. Herce, September 18, 2007
                http://www.stablevalue.org/A%20Closer%20Look%20at%20Stable%20Value%20Funds%20Performance.pdf
                                                                      Babbel Study
                   Mean-Variance Analysis
                   Mean Net Returns and Volatility Jan 89 – Dec 06
                     Average Monthly
                         Return
                   1.0%

                                                                                                                                     Stocks

                   0.8%



                   0.6%
                                                                                                           Including SV funds in the MV portfolios
                                 SV                                                                         shifts the efficient frontier leftward
                                                      Bonds
                   0.4%                                                                                    This implies that an efficient portfolio
                                   MM
                                                                                                            including SV funds achieves a higher
                                                                                                            mean return for any given level of
                                                                                                            volatility
                   0.2%



                   0.0%
                       0.0%                       1.0%                      2.0%                     3.0%                     4.0%            5.0%     6.0%

                                                                                                  Volatility
A Closer Look at Stable Value Funds Perf ormance By Dav id F. Babbel of the Wharton School and Miguel A. Herce, September 18, 2007
                 6
http://www.stablev alue.org/A%20Closer%20Look%20at%20Stable%20Value%20Funds%20Perf ormance.pdf
         Why Not Use Stable Value
• Complexity of SV can cause higher fixed and
  administrative costs for many plans that make it
  impractical
   – Small (under $200mm) and midsize ($200mm-$700mm) public
     funds may never reach the size for SV within balanced funds to
     make financial sense
      • Stable Value is not in mutual fund form which adds costs and
        administrative complexity to many platforms that cater primarily to
        mutual funds
   – Lifecycle and Lifestyle funds starting from scratch are by nature
     small causing scale issues for even the largest plans
   – May require internal expertise or increased consulting and legal
     costs
 Current use of Stable Value in
          Public Plans
• Stable Value is used extensively in Public
  Plans
• Many plans have 30% and some more
  than 40% allocations
• It is much easier to create lifestyle or
  lifecycle with SV if you have a substantial
  current stable value option
Current use of Lifestyle & Lifecycle in
            Public Plans
• DOL’s recent guidance on qualified default
  investments (QDIA) has strongly encouraged
  Lifecycle and Lifestyle plans to be offered as default
  options in corporate 401k plans, and discouraged
  use of stable value.
• Lifecycle and Lifestyle plans are small but quickly
  growing in Public Plans
• Most public plans currently do not use Stable Value
  in Lifecycle and Lifestyle plans
• A few large public plans are using Stable Value in
  either Lifecycle or Lifestyle plans
                 Conclusion
• Stable Value can add investment value over
  other fixed components in a lifecycle or lifestyle
  plan, but its complexities can add substantial
  administrative costs to a plan
• At the current time putting stable value in
  Lifestyle and Lifecycle funds is probably not an
  option for most small to mid-size public funds
• For larger public plans with a current stable
  value option, they should look seriously at using
  SV in a Lifestyle and Lifecycle funds that they
  offer now or in the future.
Q&A

				
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posted:8/30/2011
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