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Stable Value Funds in TDFs

For the first time in a couple years, the rumblings that we may be in a rising interest rate environment have reappeared. The 10-year treasury rate is now up about 1% off its all-time lows in August 2020 (which equates to about a 7.5% decline in the price). With that, we are still in a very low-rate environment, with the 10-year rate still only at about 1.6%, which matches the lowest rates from previous dips in July 2012 and July 2016. Nevertheless, pundits and investors are seemingly starting to worry a bit.

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By Clayton Fresk on March 17, 2021



For the first time in a couple years, the rumblings that we may be in a rising interest rate environment have reappeared.  The 10-year treasury rate is now up about 1% off its all-time lows in August 2020 (which equates to about a 7.5% decline in the price).  With that, we are still in a very low-rate environment, with the 10-year rate still only at about 1.6%, which matches the lowest rates from previous dips in July 2012 and July 2016.  Nevertheless, pundits and investors are seemingly starting to worry a bit.
 
Target Date Funds (TDF) have varying exposures in fixed income holdings, both in duration and quality.  However, a subset of TDFs use another tool in managing their fixed income exposure – Stable Value Funds (SV).  Stable Value funds can take a few different forms, but they have similar characteristics in that they protect against price depreciation and most often pay a higher crediting rate than other stable Net Asset Value (NAV) investments (i.e., Money Market Funds).  Outside of various structural issues, one downfall of stable values is that they are slow to raise their crediting rates in the face of higher market rates.  During the initial phase of a rising rate environment, SVs can be beneficial as they will not depreciate in price as would other fixed income investments.  However, after a certain period, SVs could have a lower crediting rate than the prevailing market rate and as such may underperform.
 
Within the TDF industry, there are 42 separate series that hold an SV in some capacity within its vintages.  As seen on this chart, the amounts of SV (as a % of the overall fixed income) vary greatly.  Also, some TDFs use SV across the glidepath, while others only utilize it in vintages closer to retirement.

(Chart Source: Stadion)
 
This 2nd chart simplifies this view, looking at the average SV exposure across the glidepath for each series:
 
(Chart Source: Stadion)
 
As you can see, there is a wide range of usage, with the average coming in at about 45% of the overall fixed income exposure being held in SV.  Some series use the SV sparingly (smaller percentages and/or using it only in vintages near retirement), while other series use the SV almost exclusively for fixed income exposure.
 
Lastly, we will look at how SV users compose the remainder of their fixed income allocation.  Since SVs are often believed to be a stable NAV product, they essentially have a zero duration.  As such, it would seem that most SV users should have a shorter duration profile in their fixed income holdings, as they are pairing down longer duration holdings with a 0-duration holding.  Here is a chart of the average duration of the fixed income holdings for the TDF universe, with those utilizing an SV in orange.
 
(Chart Source: Stadion)
 
While not the case across the board, generally the SV users have a below average duration (the average on this chart is a 5-year duration).  Some other users take a barbell approach in where they pair the 0 duration SV with a longer duration instrument, and when paired together the overall duration is closer to a broad bond average.
 
Time will tell on whether interest rates continue to rise.  We will also see whether more TDF issuers begin using SV within their fixed income allocations.

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Author: Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.

Stable Value FundsTarget Date FundTarget Date FundsTDFs
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Written By:

Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.


The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
 
A Stable Value Fund (SV) is a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital.
 
Net Asset Value (NAV) is the value of a fund’s assets minus any liabilities and expenses.
 
A Target Date Fund (TDF)is a type of investment that periodically rebalances asset class weights to optimize risk and returns for predetermined time frame.
 
A Money Market Fund is a kind of mutual fund that invests in highly liquid, near-term instruments.
 
There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.
 
The commentary, analysis and opinions expressed are those of Stadion’s Investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.
 
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Diversification does not eliminate the risk of experiencing investment losses.
 
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