Blue Prairie Group Launches Quarterly Report on Stable Value Funds
Stable value funds are a popular investment option used in defined contribution plans; however, many plan sponsors don't understand or know how to monitor them.
Blue Prairie Group, an independent, fee-only investment retirement and investment firm based in Chicago, has begun to publish an executive summary of their quarterly stable value fund research. This executive summary will be refreshed each quarter and is available at no cost on Blue Prairie Group's website.
How the Research is Conducted
Each quarter, the Investment Analytics Group at Blue Prairie Group sends out a detailed questionnaire to about sixteen leading stable value providers, representing about $150 billion of stable value assets. This information is then compiled into a proprietary database which is used to analyze long-term trends in the stable value marketplace. For example, it tracks changes in the durations and crediting rates of the largest co-mingled funds, and how the managers respond to changes in the levels of interest rates.
The database also tracks trends in market-to book ratios, changes in the levels of credit risk and in sector allocations and the impact of cash levels on the crediting rate and the duration of the funds.
The Blue Prairie Group stable value database also covers wrap contract issues asking detailed questions of the stable value managers on how they are dealing with the reality that certain wrap providers are either leaving or planning to exit the business.
Latest Findings
Here are some key findings from the most recent executive summary:
- 1-year investment performance ranged from 1.3 to 4.5 percent.
- Market-to-book ratios generally increased due to falling interest rates, which was a stronger contributor to the ratio than a weaker corporate sector, which depressed bond prices.
- Durations ranged from 1.6 to 4.4 years, and have shortened during the year. Ninety percent of the co-mingled funds in the database have durations of between 2 and 3 years.
- Crediting rates ranged from 1.85% to 4.35% and are gradually falling as new contributions are invested at lower current interest rates. The fees to wrap new funds are ranging from 15 to 25 basis points, and are equal to the yields on short-term bonds, earning a net yield near zero basis points. Consequently, many fund managers are keeping the funds invested in a money market fund.
- Fund fees range from 10 to 90 basis points. Wrap fees range from 15 to 25 basis points, and are included in the fund's total fees.
- Wrap providers have taken steps to reduce their risk to stable fund guarantees, by requiring fund managers to follow more conservative investment guidelines than a few years ago. Contract terms are more conservative and there is a greater level of specificity. There are greater restrictions on allowing stable value managers to include "impaired assets" in the portfolio.
- Portfolios have higher allocations to U.S. Treasury and Agency bonds as sources of liquidity, in the event of large cash withdrawals.
Full report is located here: www.blueprairiegroup.com/wp-content/uploads/SV-Exec-Sum-12-06-2011-Final1.pdf
The Q4 2011 report which will be released in mid-February. It will introduce a ranking system of stable value products.
Rick Meigs, President, 401khelpcenter.com
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