Stable Value Funds Benchmark

Image of a magnifying glass.Stable Value Funds are not traditional securities existing almost exclusively in the Qualified Plan world. As such their market related risk metrics, (in our view) may not reflect market risk completely. Most stable value funds are valued with some “book value” accounting metric rather than a mark–to–market valuation as in securities.

The Pimco Moderate Duration Stable Value Composite elects to use a market based methodology, which we believe can provide a more accurate risk measurement. We have elected, for your specific benefit in our modeling simulation process, to have all stable value funds represented by this composite “benchmark”. As a class, stable value funds all reflect modest standard deviation and consistent stable returns, so we believe our report will be most useful using this benchmark for all stable value funds.

The Pimco Moderate Duration Stable Value Composite elects to use a market based methodology, which we believe can provide a more accurate risk measurement. We have elected, for our modeling purposes, to have all stable funds represented by this composite “benchmark”. As a class, stable value funds all reflect modest standard deviation and consistent stable returns, so we believe our report will be most useful using this benchmark for all stable value funds.

We started with the question: How do we include Stable Value Funds (SVF) into our model? The core issue was this category of investment is only available through employer-sponsored retirement plans such as 401k, 403b, 457 and some 529 college savings plans.

SVF’s fill an important role in these investment programs as a low-risk holding many participants want and need in their saving plan. The industry is well developed and you can find valuable insight by visiting the Stable Value Investment Association.

For our purposes, building a risk/allocation/design tool, we needed a uniform benchmark to reasonably represent all stable value funds. Because this asset class is not a traditional security, it is difficult to apply the market based risk measures. We chose the Pimco Moderate duration Stable value composite because they address this by employing a more market based pricing.

The result is evident when you examine their Sharpe ratio as compared to other SVF’s using book value metrics. Without their adjustments they too would report a 3 year Sharpe ratio of 11.82 – 33.94! After their adjustment we see a very good, but in our view more reasonable, Sharpe ratio of 1.02 (3 year data 11-30-2010 through 11-30-2013).

We are supporters of SVF’s as an important asset class and do not favor one over the other. Our goal was to find a reasonable solution to modeling SVF’s in our allocation/design/risk tool.

401k-Checkup Team.

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