The stable value industry is getting set to take on the equity market in its revitalized move to slow the flow of defined contribution assets from GIC funds.
The association doesn't expect to reverse the trend. Still, it's planning a communications and educational program to show that stable value investments play a major role in defined contribution plans.
The association has compiled data showing GIC funds have outperformed money market funds while offering the same low levels of risk. The data also show GIC funds offer returns comparable with those of intermediate-term bonds, with significantly less risk, according to information presented at the Stable Value Association 1996 National Forum in Washington in October.
The effort to return the stature of the GIC to its once most favored position in the defined contribution market comes on the heels of the Stable Value Association's recent move to Washington and the selection of Cynthia Hargadon as association's new president. Ms. Hargadon is former chief investment officer at ICMA Retirement Corp., Washington, where she was responsible for $5.5 billion in trust fund assets.
Her task: revitalize stable value investing.
According to recent data from Access Research Inc., Windsor, Conn., the proportion of 401(k) participant contributions going into equity funds rose to 73.1% this year from 64.4% in 1994, while the percentage directed to stable value dropped to 14.5% from 17.8%.
Access Research also said about 40% of the participant money going into equities is coming from stable value funds.
Ms. Hargadon said 401(k) education programs have pounded home - and participants have adopted - the concept that equities are the only logical long-term growth investment. But, she said, GICs have a valuable.
According to research from John Hancock Financial Services, Boston, and Hueler Analytics, Minneapolis, a GIC portfolio with a five-year average maturity returned a compound annual 10.1% between 1983 and 1995, with a standard deviation of 2%.
In contrast, the Lehman Intermediate Government Corporate Bond Index returned 10.03% with a standard deviation of 5.44%; money market funds returned 6.42% with a standard deviation of 2.23%; and the Standard & Poor's 500 Stock Index returned 16.67% with a standard deviation of 13.28%.
Ms. Hargadon said the association will mount a communications effort showcasing the results of the research into return and risk.
Ms. Hargadon believes stable value funds have their place, especially since bull markets don't last forever. Stable value investments offer just what the name implies: stability in an uncertain market, she said.
"I'm concerned about an equity market correction since many 401(k) investors haven't experienced a real and prolonged market downturn," said Ms. Hargadon.
"We need to provide to consultants, academics and others who influence investment theory and who consult with plan sponsors data which we feel support the use of stable value investments," she said.
"We (the association) are now in a position to take on this responsibility and to get the information out there. Our long-term theme is to provide accurate information about stable value investments," she said.
"We are going to try to overcome the misperceptions regarding stable value investing and to correct the view that it is somehow incomplete or wrong," she said.
Special attention will be paid to consultants, she said, since they provide guidance on which funds are offered by 401(k) plans and are often responsible for communicating with plan participants.