A stable value fund is an insured investment vehicle seeking to provide principal preservation while generating predictable and positive returns. The funds are made up of investment-grade fixed-income securities such as corporate and government debt. The funds provide investors with a low-risk tolerance and capital preservation needs an avenue to invest their money.
Stable value funds are viewed as a steady, conservative, and safe approach to investing. The funds have “wrap contracts” which protect the investment principal through insurance guarantees offered by insurance companies and banks assuring the funds won’t go below the fund’s net asset value (NAV) of $1 per share. If the fund goes below the NAV, it’s the wrap issuer's obligation to make the fund whole. Although the funds are perceived as safe, no investment is truly guaranteed.
Pros & Cons
As the name reflects, stable value funds are indeed stable when it comes to return and principal preservation making the investment an appropriate vehicle for risk-averse investors looking for low-volatility investments. The insurance portion of the fund may help reinforce conservative investors’ fears of volatility in the market.
Due to the fund's fixed income composition, investors looking for income, such as retirees, would be wise to consider stable value funds as part of their portfolio allocation.
Stable value funds contain a negative equity correlation which enables investors to use the funds as diversification in their portfolio allocation strategy.
Although a benefit of stable value funds is predictable returns, the drawback is the returns are typically lower than investing in equities. This may not be an issue if an investor determines the risk/reward of equities are not worth it for them because of a low-risk tolerance or other suitability factors.
When considering stable value funds, investors should make certain they understand the fees involved as fees will have a negative consequence on their returns.
Inflation risk is a factor an individual should consider before investing in stable-value funds. Due to lower returns, the fund has the possibility of not being able to keep pace with inflation. This means an investor can lose purchasing power due to the decrease in the value of their money.
Stable Value Funds vs Money Market Funds
Money market funds are made up of liquid, short-term debt securities while stable value funds are composed of short and intermediate-term securities. The securities invested in stable value funds are not as liquid compared to money market funds but are still considered very liquid. Stable value funds typically have a higher yield, and as an added benefit, stable value funds contain wrap contracts.
How you can invest in a stable value fund
Stable value funds are not widely available to invest in. Individuals will typically only see stable value funds in a 401(k) along with other defined contribution plans. This limitation is an important aspect to consider if an investor wants to roll their 401(k) into an IRA as they will not be able to replicate their 401(k) portfolio.
The first step to investing in a stable value fund is to see if the investment is an option as not all 401(k) plans offer these funds. If the workplace retirement plan does offer the fund, the next step is to research if the fund is suitable for the investor. Aspects to consider include, but are not limited to, how long the fund has been in operation, fund management tenure, portfolio composition, fees, performance, and investment minimums. Once the research has been completed, if the investor decides to invest in the fund, they must select the fund through their workplace retirement plan portal or contact the customer service department to implement the investment. Lastly, as with any investment, the investor must monitor the fund to make certain the fund remains a suitable part of their portfolio and the fund is performing as it should.
Pascack Capital LLC (“PC”) is a registered investment advisor offering advisory services in the State of New Jersey and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
Pascack Capital LLC, its owners, officers, directors, employees, subsidiaries, service providers, content providers, and any third-party affiliates do not offer the sale of securities or other investments.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon for purposes of transacting in securities or other investment vehicles.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pascack Capital LLC (referred to as “PC”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute PC’s judgement as of the date of this communication and are subject to change without notice. PC does not warrant that the information will be free from error. Your use of the information is at your sole risk. Under no circumstances shall PC be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if PC or a PC authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.