Stable Value Funds: Performance from 1973 Through 2008

Abstract

There is a paucity of academic literature on stable value funds, although they occupy such a prominent place among retirement investment vehicles. They are offered in roughly one half of all defined contribution plans in the USA, with over $640 billion dollars worth of assets under management. This paper is the first to rigorously examine their performance throughout the entire period their inception in 1973. We conduct mean-variance analysis, Sharpe and Sortino ratio analysis, stochastic dominance analysis, and optimal multi-period portfolio composition analysis. Our evidence suggests that stable value funds dominate two (and nearly three) major asset classes based on a historical analysis, and that they occupy a prominent position in optimal portfolios across a broad range of risk aversion levels. We discuss the factors that contributed to stable value’s remarkable performance and whether it can continue to maintain it into the future. In our paper, innovations are achieved in constructing efficient stochastic dominance algorithms, incorporating return expectations in multi-period portfolio construction, and in examining the multi-relations among competing stable value funds. We also provide a stable value returns index based on actual fund returns.