(Bloomberg News) Galliard Capital Management Inc.'s stable-value funds, designed to preserve principal in tumultuous times, drew more than four times the usual inflows in August as market volatility increased, said managing partner John Caswell.
Investors in retirement plans administered by Wells Fargo & Co. moved $850 million into the funds that month, while at Aon Hewitt, a benefits manager, about $1 of every $5 transferred by plan participants was put in a stable-value fund.
While the funds recently have outperformed the stock market, investors should realize they're riskier than money funds, and may contain restrictions on transfers and withdrawals, said Jeff Elvander, chief investment officer for Aliso Viejo, California-based 401(k) Advisors Inc., a consultant to employers that offer defined-contribution retirement plans.
"Some of those restrictions may not be clearly communicated until a participant tries to make a transaction, and then they're prevented from making it," Elvander said.
Stable-value funds are viewed by many investors as a higher-yielding alternative to money-market funds, said Pamela Hess, director of retirement research at Aon Hewitt, a unit of Aon Corp. In August they returned 0.22 percent, compared with the 5.68 percent decline in the Standard & Poor's 500 Index. They achieve those returns in part by purchasing insurance contracts, which come with restrictions. The funds are riskier than the typical money-market fund, meaning they aren't really comparable investments, said Donald Stone, president of Chicago-based Plan Sponsor Advisors.
No Guarantees
"There's a reason why they call them stable value, not guaranteed," Stone said. "I don't think participants understand that. They understand if they put a dollar in they'll get a dollar back, and some interest."
There was about $540 billion invested in stable value products as of December, according to the Stable Value Investment Association. The funds are more complicated than most investors realize, said Hess.
Although they're often called "funds," stable-value can refer to funds that pool one or more retirement plan's assets, and to insurance contracts, in some cases annuities, that are offered within defined-contribution retirement plans such as 401(k)s. The funds generally invest in short- to intermediate- term bonds and buy insurance on their portfolios. The contracts are issued directly to a retirement plan sponsor or to its participants, and offer an interest rate that resets periodically.
Smooth Ride
By buying insurance on their portfolios, the funds can allow investors to redeem shares at principal plus interest, even though the underlying bonds may be lower or higher in price. The insurance is meant to cover a potential shortfall should a fund have to sell bonds to meet redemptions.