Abstract
Little in the scholarly economics literature is directed specifically to the performance of stable value funds, although they occupy a leading place among retirement investment vehicles. They are currently offered in more than one-third of all defined contribution plans in the USA, with more than $800 billion of assets under management. This paper rigorously examines their performance throughout the entire period since their inception in 1973. We produce a composite index of stable value returns. We next 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 (on average) two major asset classes based on a historical analysis, and that they often occupy a significant position in optimized portfolios across a broad range of risk aversion levels. We discuss factors that contributed to stable value funds’ past performance and whether they can continue to perform well into the future. We also discuss considerations regarding whether or not to include stable value as an element in target date funds within defined contribution pension plans.
Highlights
In this updated study,1 we reexamine the past history of stable value (SV) funds and their performance over the past 43 years, with particular emphasis on the past 27 years
That there are other important aspects of performance, discussed later, which are not captured by mean-variance analysis, so one should not jump to conclusions about the dominance of SV funds over these other asset classes based solely on mean-variance analysis
We used mean-variance, stochastic dominance and intertemporal optimization analyses to explore the performance of SV funds vis-à-vis U.S large and small cap stocks, long-term government and corporate bonds, intermediate-term government bonds and money market funds, during the 43-year period March 1973 through December 2015
Summary
We reexamine the past history of stable value (SV) funds and their performance over the past 43 years, with particular emphasis on the past 27 years. The lack of performance analyses did not forestall an onslaught of articles criticizing stable value and advocating that plan participants downsize their allocations toward the SV options (e.g., (GAO 2011)). In this updated study, we provide a rigorous analysis of the performance of SV funds, enlisting an extended data set that goes from 1973 through 2015. We include SV return data through the end of 2016 for informational purposes only.8 We compare their performance to that of basic asset classes such as U.S large and small stocks, long-term government and corporate bonds, intermediate-term government bonds, and money market funds, using three methods: mean- variance analysis, stochastic dominance analysis, and an enhanced multiperiod utility analysis. We comment briefly on the themes and considerations of plan sponsors and their fiduciaries who choose not to include SV funds in their menus of options for plan participants and consider complications for incorporating SV in the increasingly popular target date funds
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