Stable value is making a comeback.
Defined contribution plan participants, weary of market volatility, have poured $45 billion into stable value investments for the first nine months of 2001, the Stable Value Investment Association said. That's a 43% increase over a year ago.
Indeed, with some stock market indexes off more than 15% this year, stable value funds yielding more than 6% are looking good.
Money managers specializing in stable value remember what it's like to be the favorite: Until the 1990s, stable value made up the bulk of 401(k) account balances. But investors' love affair with equities - coupled with investment education that stressed diversification resulted in major shifts out of stable value and into stocks.
In its heyday, stable value accounted for nearly 36% of the assets in the nation's largest defined contribution plans, dropping to 14% by 1999, according to Pensions & Investments' annual pension fund survey.
But participants now are plowing money back into stable value, both by moving money out of equities and by directing new contributions into stable value funds.
According to the Hewitt 401(k) Index, which tracks the daily transfer activity of nearly 1.5 million participants, assets allocated to stable value have risen to more than 21% during the first 10 months of 2001, from about 17% in January.
On the contribution side, the index shows participants earmarked 16% of their contributions to stable value in October, That's up from 7.5% in February and 11% in June.
Hueler Analytics, Minneapolis, which tracks the pooled stable value fund universe, reported a 21% increase in total universe assets for the nine months through September, to more than $61 billion from $50 billion on Dec. 31, 2000. By contrast, the universe declined by about 1% for the same period in 2000. The Hueler universe represents more than 90% of pooled stable value funds.
The major players' own statistics back up those broad statistics.
AEGON Institutional Markets Inc., a unit of AEGON Insurance Group, Louisville, Ky., the largest issuers of guaranteed investment contracts, reported stable value deposits are booming. AEGON saw $5.5 billion in new stable value deposits from January through June, compared with $2.6 billion in the first six months of 2000. Through Oct. 31, AEGON has taken in nearly $10 billion in stable value deposits this year, according to Aruna Hobbs, director of business development and head of the stable value unit.
"We've had a very good year, all things considered," she said. Stable value investments, along with money market funds and bonds, had lost momentum as the bull market pushed equities higher. "Now, (stable value) is viewed as a more realistic long-term core allocation," she said. "During a booming market, stable value funds hold little appeal for investors accustomed to reaping sky-high returns from stocks and mutual funds. But as a diversified core holding, stable value can help reduce the sting in a market downturn," Ms. Hobbs said.
She said most of the $10 billion taken in by AEGON this year has been new cash flow from existing plans, and only a small portion is from new business.
Ms. Hobbs said year-to-date placements by AEGON "reflect current market conditions" in the industry. "This year has been phenomenal, and we expect it to continue through next year."
Kelli Hueler, president of Hueler Analytics, said significant first-quarter inflows to stable value "reflect what people experienced in the market last year."
"When people started getting their statements at year end, it didn't look good; balances were down significantly," she said. "People had just gotten ahead of themselves and were overweighted in stocks. The cash flow into stable value is a direct reflection of that."
Aside from large first-quarter inflows, she said that after Sept. 11, "we saw more new dollars coming into stable value as people grew more concerned about their security and the stock market."
Moving out of equities
According to the Stable Value Investment Association, of participants who did shift out of equities in September, 56% transferred assets into stable value funds. About 25% went to traditional bond funds and 19% to money market funds.
Falling interest rates, a declining stock market and an aging work force combined to boost allocations to stable value funds this year, according to Gina Mitchell, executive director of the Stable Value Investment Association, Washington.
"People have gotten an education in diversification," she said. "I hope the cost isn't too high." She said the growth in stable value deposits at AEGON and others is not unique.
"During the 1990s, people didn't have to worry about diversification with stocks in an upward spiral and huge inflows into equities. But stable value allocations have been growing for the last year and a half," she said. "People are now aware of the downside risk (in stocks). But, it's one thing to see it as a concept, and another thing to get your statement in the mail and see the erosion in account balances."
Bruce Goode, president and chief investment officer of Goode Investment Management Inc, Cleveland, said the two pooled stable value funds he manages have seen significant increases in inflows.
"The money already was heading to stable value, but after Sept. 11 there were substantial increases," said Mr. Goode. He said nearly $150 million in new money has gone into the $1.3 billion Goode EB MaGic fund this year, and the Goode Stable Value Fund, a new fund, has gained $100 million in the past 12 months - $50 million of that from the State Retirement and Pension System of Maryland.
"Some people were 100% in equities and were chasing the (equity) bubble," he said. Now, he said, participants are seeking stability and returns similar to short-term bonds without the volatility in the bond market.
Peter Bowles, president and chief investment officer at Fiduciary Capital Management, Waterbury, Conn., said his stable value management firm has seen "modest" increases in new money this year. "That's healthy," he said. "It means people aren't bailing out of equities."
Phil Suess, consultant with William M. Mercer Inc., Chicago, agreed participants are starting to direct more contributions to stable value. But he believes many have pulled out of equities as well. "The inflow (to stable value) this year has been significant, and our expectation is that more of this money is likely to stick longer," he said, unlike in the past when participants tended to pull money out of stable value and money markets to invest in equities.
He said among his larger clients, he has seen more than cash flow going into stable value funds. Some plans, he said, experienced shifts to stable value from equities of eight to 10 percentage points.