Stable Value Fund Inflows Surge During August Volatility

Advisors concerned over client confusion between stable value and money market funds

Investors flocked to stable value funds in an effort to smooth volatility experienced in August, apparently seeing them as a higher-yielding alternative to money markets.

Bloomberg reports Galliard Capital Management’s stable-value funds saw more than four times the usual inflows in August as market volatility increased. Investors in retirement plans administered by Wells Fargo & Co. moved $850 million into the funds that month, and Aon Hewitt, a benefits manager, had $1 of every $5 transferred by plan participants put in a stable-value fund.

But the news service warns that while the funds recently have outperformed the stock market, “investors should realize they’re riskier than money funds, and may contain restrictions on transfers and withdrawals.”

“Some of those restrictions may not be clearly communicated until a participant tries to make a transaction, and then they’re prevented from making it,” Jeff Elvander, chief investment officer 401(k) Advisors Inc., a consultant to employers that offer defined-contribution retirement plans, told Bloomberg.

The “stable value” largely comes from the purchase of insurance which, unlike money market funds, contains certain restrictions related to liquidity and redemptions. According to the Stable Value Investment Association, stable value funds are structured in two ways: as a separately managed account, which is a stable value fund managed for one specific 401(k) plan; or as a commingled fund, which pools assets from many 401(k) plans. Commingled funds offer the benefits of diversification and economies of scale for smaller plans.

“Regardless of how stable value funds are structured, they are comprised of a diversified portfolio of fixed income securities that are insulated from interest rate movements by contracts from banks and insurance companies,” according to the association’s website. “The protection from interest rate volatility is universal to stable value funds. How this contract protection is delivered depends on the type of stable value fund investment purchased.”

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