That was certainly the case in 1999. When interest rates ticked up that year, the average government intermediate-term bond fund fell 1.7%, and the Lehman Brothers Corporate Bond Index dropped by 1.9%, according to Lipper. By contrast, Scudder PreservationPlus Income ended the year with a 5.99% return.

Despite their resilience in a bearish bond market a few features of stable value funds, as well as an uncertain regulatory environment, bear watching. While they would probably hold up better than traditional bond funds in a rising rate environment, their redemption fees mean that investors would not necessarily escape totally unscathed.

To help head off the potential for massive shareholder redemptions if rates vault rapidly, Scudder reserves the right to impose a 2% contingent redemption charge if investors cash out when the rate of the Lehman Brothers one-to-ten-year Treasury Index exceeds the yield of the fund portfolio by more than 155 basis points. While that has not happened since the fund was established in 1999, it is not an unthinkable scenario. And since there is no time limit on the fee, it would apply whether you've held the fund for six months or six years. Another interest-rate-related-risk for stable value funds includes the possibility of a spike in money market rates, which would make yields on the short- and intermediate-term securities the funds invest in less attractive by comparison.

Mitchell believes that neither development would spark a massive exit by shareholders. "Investors like stable value funds because they offer steady, positive returns minus the volatility of a bond fund," she says. "They are also a powerful diversifier, and people don't want to abandon that."

Aside from changes in interest rates, other factors could impact yields. Stable value funds are more expensive to run than traditional bond funds, and several fund companies waive a portion of their costs to keep their expense ratios at 1%. Discontinuing that policy would trim yield by about 30 to 50 basis points, according to the latest prospectuses from PBHG and Scudder. Credit mishaps could also impact fund yield because the insurance wrapper only pledges to maintain a steady net asset value and does not guarantee against losses from credit-related issues.

Finally, it's probably a good idea to keep an eye on the SEC's investigation into how stable value fits into its accounting framework for mutual funds, and how the insurance company wrapper agreements work. According to Mitchell, about ten to 15 funds are "in limbo" because of the investigation, which first came to light in a Wall Street Journal article earlier this year. The Stable Value Investment Association's website offers a mildly encouraging, yet inconclusive, take on the matter. "Although no one knows what the SEC will decide," notes the site, "if the SEC decides that the accounting should be different, making it difficult for mutual funds to continue to hold a stable share value, some stable value managers have indicated it is unlikely that the shares of their funds will experience an immediate significant drop in value in today's low interest rate environment." An SEC spokesman declined to comment on the issue.

Stable Value Funds Available To Financial Advisors

Scudder Preservation Plus Income Fund from Deutsche Preservation

Plus Income Fund, (800) 621-1048

Gartmore Morley Capital Preservation Fund, (800) 485-2294

PBHG IRA Capital Preservation Fund, (800) PBHG-NOW