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CFA CFP CPE

Important Reminder!!!. Be sure to sign the “Sign-In/Sign-Out” sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification). CFA CFP CPE. Stable Value Funds . Moderator: Polly Scott, State of Wyoming Panel:

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CFA CFP CPE

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  1. Important Reminder!!! Be sure to sign the “Sign-In/Sign-Out” sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification) • CFA • CFP • CPE

  2. Stable Value Funds Moderator: Polly Scott, State of Wyoming Panel: Anthony Camp, ING Chris Tobe, NEPC Michael Wyatt, T. Rowe Price Associates, Inc.

  3. Stable Value 101 Tony Camp, CEBS Vice President ING Stable Value Product Group

  4. What is Stable Value? A Stable Value Fund is a conservative investment vehicle. It seeks to provide a stable rate of return. Stable value investments earn interest income comparable to that of intermediate term, high-quality fixed income securities, with a lower risk for loss of principal. The primary objectives of a Stable Value Fund are: • Preservation of Principal • Competitive Returns • High Liquidity

  5. Two Components Drive Stable Value Engine Underlying Bond Portfolio Transmission Book Value Wrap

  6. Individually actively managed portfolio of high-quality, fixed income securities • The book value wrap allows for preservation of principal and provides stable crediting rate •  • The wrap contract smoothes market volatility by amortizing gains and losses over the duration of the portfolio •  • This smoothing is triggered through the rate reset mechanism and insulates against day-to-day volatility Stable Value Portfolio Falling interest rates Asset Value Market Value of underlying portfolio Wrap Rising interest rates “Book Value Wrap” or guarantee Time Wrap Value –Book Value – Market Value

  7. Stable Value Overview • Stable Value as an asset class can be found in most 401(a), 457 and 403(b) Plans • Many different flavors of products - different regulations govern structure of product within each market • Products have different levels of guarantees • The stronger the guarantees, the higher the overall cost to the insurer and participant • Underlying assets primarily invested in Fixed Income Securities

  8. Stable Value Product Manufacturers • Insurance Companies • Banks • Mutual Fund Providers • Stable Value Managers • Defined Contribution Full Service Providers

  9. Stable Value Product Timeline 1930Defined Benefit plan liabilities funded through insurance company general account 1974Birth of Defined Contribution Plans - "IPG" General Account key investment option 1980 Birth of Insurance Company issued Guaranteed Investment Contracts Insurers innovate "IPG" general account stable value products Birth of Pooled Stable Value Funds 1987Birth of Bank issued Guaranteed Investment Contracts (BICS) 1990Birth of "Synthetic" and "Separate Account" GICs 1991Stable Value Manager firms initiated 1997First Stable Value Fund becomes registered "40 Act Fund“ 2003SEC eliminates registration for stable value funds 2006DC Investment Options with Guaranteed Minimum Withdrawal Benefits

  10. Size of the Stable Value Market

  11. Stable Value Benefits Participants! The Benefits of Using A Stable Value Fund • Potential for Returns Higher than Money Market Funds with Risk Lower than a Bond Fund • High Credit Quality and Issuer Diversification • Principal Preservation is Number One Objective

  12. Stable Value Investing Considerations Stable value investing may be an ideal investment for: • Retirees or individuals nearing retirement who will begin to access retirement funds now or in the near future. • Conservative investors who seek a core portfolio component that may provide an attractive return coupled with the opportunity for low volatility and preservation of capital. • Moderate or aggressive investors seeking diversification to enhance their overall portfolio risk-adjusted returns. • An investment alternative to money market funds and short-term bond funds.

  13. Stable Value Trends • Trends • Target Fund Explosion DOL exclusion of Stable Value as a QDIA - Causing change in plan default option • Younger employees/new plans - Equity investors • Boomers - Leave $$ in plan • 2008 Cashflow - QDIA excludes Stable Value - Participant flight to Stable Value • Percent of Plan Assets • 1980’s - 30% - 60% • 1990’s - 20% - 40% • 2000+ - 10% - 30%

  14. STABLE VALUE: “WEATHERING THE STORM” Michael J. Wyatt Head of T. Rowe Price Stable Asset Management

  15. STABLE VALUE – BUILT FOR SMOOTH SAILING 3

  16. WHAT HAPPENS WHEN THE SEAS TURN STORMY? 5

  17. THE JOURNAL OF WALL STREET Oil reaches all time high Stock market in decline Bad News Everywhere! Fed concerned about inflation (and low growth rate) Credit Markets in Turmoil Corporate Profits Down Consumer Confidence Low Economy in Depression

  18. STABLE VALUE STORM CLOUD INFLUENCERS Regulatory Considerations Equity Market Volatility Fed Activity Quarter End Account Statements Corporate Events Cash Flow Activity “Problem” Assets

  19. SINCE JUNE OF 2006, THE FED HAS LOWERED RATES BY 325 BASIS POINTS Sources: Bureau of Economic Analysis, Federal Reserve Board and Haver Analytics

  20. STABLE VALUE – ANNUALIZED YIELDS (As of 6/30/08)

  21. BOOK VALUE WRAPPER – A PORTFOLIO LIFE PRESERVER Fixed Income Portfolio

  22. STABLE VALUE SUCCESSFULLY WEATHERS THE STORM 3

  23. The use of Stable Value in Lifecycle & Lifestyle Plans Chris Tobe, CFA, CAIA Senior Consultant NEPC

  24. Lifestyle plans ? • SV has superior risk and return characteristics to other fixed income allocations • Higher returns than money market* • Similar returns but lower volatility to bond funds • SV’s lower correlation to equities compared to other fixed options reduces overall volatility *A Closer Look at Stable Value Funds Performance By David F. Babbel of the Wharton School and Miguel A. Herce, September 18, 2007 http://www.stablevalue.org/A%20Closer%20Look%20at%20Stable%20Value%20Funds%20Performance.pdf

  25. Stable Value Performance • http://www.hueler.com/

  26. Babbel Study • Study by Wharton Professor David Babbel was commissioned by Stable Value Investment Association • While there is not enough history for actual results the Babbel study modeled stable value in balanced portfolios • They found that stable value was superior in investment risk and return characteristics to both money market and bond funds • Conclusion is that Lifecycle and Lifestyle funds with stable value are superior to those using other fixed income options • A Closer Look at Stable Value Funds Performance By David F. Babbel of the Wharton School and Miguel A. Herce, September 18, 2007 • http://www.stablevalue.org/A%20Closer%20Look%20at%20Stable%20Value%20Funds%20Performance.pdf

  27. Babbel Study • A Closer Look at Stable Value Funds Performance By David F. Babbel of the Wharton School and Miguel A. Herce, September 18, 2007 • http://www.stablevalue.org/A%20Closer%20Look%20at%20Stable%20Value%20Funds%20Performance.pdf

  28. Why Not Use Stable Value • Complexity of SV can cause higher fixed and administrative costs for many plans that make it impractical • Small (under $200mm) and midsize ($200mm-$700mm) public funds may never reach the size for SV within balanced funds to make financial sense • Stable Value is not in mutual fund form which adds costs and administrative complexity to many platforms that cater primarily to mutual funds • Lifecycle and Lifestyle funds starting from scratch are by nature small causing scale issues for even the largest plans • May require internal expertise or increased consulting and legal costs

  29. Current use of Stable Value in Public Plans • Stable Value is used extensively in Public Plans • Many plans have 30% and some more than 40% allocations • It is much easier to create lifestyle or lifecycle with SV if you have a substantial current stable value option

  30. Current use of Lifestyle & Lifecycle in Public Plans • DOL’s recent guidance on qualified default investments (QDIA) has strongly encouraged Lifecycle and Lifestyle plans to be offered as default options in corporate 401k plans, and discouraged use of stable value. • Lifecycle and Lifestyle plans are small but quickly growing in Public Plans • Most public plans currently do not use Stable Value in Lifecycle and Lifestyle plans • A few large public plans are using Stable Value in either Lifecycle or Lifestyle plans

  31. Conclusion • Stable Value can add investment value over other fixed components in a lifecycle or lifestyle plan, but its complexities can add substantial administrative costs to a plan • At the current time putting stable value in Lifestyle and Lifecycle funds is probably not an option for most small to mid-size public funds • For larger public plans with a current stable value option, they should look seriously at using SV in a Lifestyle and Lifecycle funds that they offer now or in the future.

  32. Q & A

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