When the financial crisis ravaged the stock market and many parts of the bond market, stable-value funds stood out with their combination of modest, positive returns and their, well, stability. As a result, retirement savers clamored for these steadfast funds and the security they offer. The percentage of assets invested in stable-value funds in large-company 401(k) plans that offer a stable-value option rose from 20% in November 2007 to 36% in March 2009, according to Hewitt Associates, a benefits-consulting firm. Although the total amount invested in stable-value funds has fallen as stocks have recovered, such funds retain more than $642 billion in assets, which makes them the largest category of fixed-income investment in 401(k) plans.
It's easy to see why investors fled to stable-value funds during the bear market. From the stock market's peak on October 9, 2007, through its trough on March 9, 2009, Standard & Poor's 500-stock index lost 55%. During the same period, the average stable-value fund returned a respectable 7% -- with little of the drama that played out in the stock market. In the first six months of 2009, the average stable-value fund returned 2.1%, while the typical intermediate-term bond fund earned 5.7% and the average money-market fund made a paltry 0.1%. The S&P 500 gained 3.0% in the first half, but not before losing 25% through March 9.
Stable-value funds have performed impressively over longer periods, too. The funds returned an annualized 5.5%, on average, over the past ten years through June 30, blowing away the 2.9% annualized return of the average taxable money-market fund. The average taxable intermediate-term bond fund did worse, returning 4.4% annualized over the ten-year period -- and it did so with considerably more volatility. Inflation, meanwhile, averaged 2.6% a year.
Stable-value funds are available mainly through employer-sponsored retirement plans. Overall, about half of all employees have access to these funds, but only one-third of the retirement plans of small and midsize businesses provide a stable-value option. As a safe haven that provides inflation-beating returns, a stable-value fund could play an important role in your portfolio. "When you open your 401(k) statement, it should be the one fund that is always in green," says John Sturiale, the manager of a stable-value fund offered by Charles Schwab.
But as with everything else in investing, there's a catch. Stable-value funds may not be quite as stable as their name implies.
Although they are often compared to money-market funds and intermediate-term bond funds, stable-value funds are more complex. They differ in both the way they invest and how they handle risk.
Stable-value funds normally invest in short- to medium-maturity bonds, including government, corporate and mortgage securities. The bonds these funds buy are typically due in two to four years. By contrast, the average maturity of the IOUs in a money-market fund may not exceed 90 days.