Stable Value Portfolios: Low-Risk Investments in a High ...

[Pages:2]The Institutional Investor Guide to Institutional Asset & Wealth Management

Stable Value Portfolios: Low-Risk Investments in a High-Risk Era

By Lisa Black, Head of Global Public Fixed-Income Markets diversification of underlying contract issuers by using more than and Philip T. Maffei II, Senior Director, Stable Value Products one insurance company wrap.

In a time of low interest rates and high market volatility, stable value portfolios merit renewed interest from investors. These low-risk portfolios guarantee principal, protect against credit and interest-rate risk, and provide liquidity at

book value, all while generating returns that have historically

outperformed other types of low risk investments. These

features are attractive to the growing number of baby boomers

who are moving toward retirement, as they are increasingly

In all types of market environments, stable value portfolios have a long history of delivering steady, consistent returns, even in periods of extreme volatility.

focused on preserving capital rather than pursuing rapid capital growth or seeking strategies that target higher levels of income.

Stable value portfolios, which may invest in short- to intermediate-term bonds, are a sound choice for those pursuing long-term investment strategies given the consistency of such portfolios through multiple market cycles. According to the Stable Value Investment Association, stable value portfolios, in varying incarnations, are offered in approximately half of all 401(k) plans, and

are also offered within some 529 tuition savings, 403(b) and 457

plans. Stable value portfolios are available through a variety of

product structures, including guaranteed annuity contracts and

collective investment trusts.

Getting used to the new normal One of the factors contributing to the popularity of stable

value portfolios has been their steady performance, especially when considering the above-average volatility of markets over the past five years. While high volatility often leads investors to flock to fixed income as a safe haven, stable value portfolios have the added benefit of a more predictable performance outcome when compared to a typical short- to intermediatematurity bond mutual fund portfolio.

The underlying investments and structure of stable value portfolios often feature "wrap" or guaranteed contracts issued by banks or insurance companies. Wrap contracts provide financial protection and allow stable value products to credit returns that are based on the yields of securities held while shielding investors from fluctuations in the value of underlying portfolio holdings. Several stable value products also provide

The "sleep-at-night" investment Over a full market cycle, stable value products have generally

provided returns similar to those of short- to intermediate-term bond funds but with volatility of returns similar to that of money market funds.1 In 2008, when virtually every market plummeted, stable value funds rose 3 percent to 5 percent, and they were one of the only investments available in retirement plans to realize positive returns, according to the Stable Value Investment Association. More recently, the Hueler index of stable value pooled funds generated a one-year book value return of 2.59 percent in the period ending March 31, 2012.2

In all types of market environments, stable value portfolios have a long history of delivering steady, consistent returns, even in periods of extreme volatility, as noted above. An analysis published in 2011, co-authored by David F. Babbel, a professor at the University of Pennsylvania's Wharton School of Business, found that from January 1989 through December 2009, stable value fund investments had, on average, "a higher net monthly return and a lower return volatility than either money market or intermediateterm government/credit funds."

Stable value portfolios can also mitigate interest rate risk. While interest rates have been at extremely low levels, they should rise as the economy recovers. During such periods of rising rates, returns credited by stable value products are likely to increase. By comparison, values of bonds tend to be negatively impacted during periods of increasing interest rates. Investors should understand the structures of the stable value portfolios which they're considering for investment, focusing on how crediting rates are set and the terms of the liquidity provisions.

Not all stable value portfolios are created alike In selecting a stable value provider, it is important to identify

a manager that has a depth of experience in the asset class and that has the dedicated resources and demonstrated commitment necessary to provide products that perform consistently and predictably over time.

Effective stable value managers employ a sound investment process that results in portfolios capable of generating an attractive level of yield while limiting default risk and maintaining sufficient liquidity to satisfy redemptions. To meet these objectives, teams may invest in a mix of securities with short- to intermediate-term duration (3-5 years) that may include government and agency credit, mortgage-backed securities, asset-backed securities,

1 ? Stable Value Portfolios: Low-Risk Investments in a High-Risk Era ? Co-Published by TIAA-CREF

Reprinted from June 2012 Institutional Investor

The Institutional Investor Guide to Institutional Asset & Wealth Management

investment-grade corporate debt, and high-yield debt.

Given the continuous evolution in global market conditions, with

changes often unfolding in rapid fashion, portfolio teams must have

seasoned managers who can identify not only market opportunities

and vulnerabilities early in the cycle, but also understand when

they should--and should not--take action.

Underpinning all of the work carried out by portfolio

management teams must be rigorous analysis of the fixed income

securities in the underlying portfolio, focusing on the performance

Investors should understand the structures of the stable value portfolios which they're considering for investment, focusing on how crediting rates are set and the terms of the liquidity provisions.

of individual securities ("bottom up" research) as well as on contract terms that dictate liquidity requirements. Robust risk management tools that monitor concentrations of various sources of risk --including credit, interest rate, issuer, and prepayment risk--should be in place to control for unintended portfolio exposures. To evaluate the effectiveness of manager qualities and processes, it is critical to perform thorough due diligence with portfolio managers and their risk management teams.

TIAA-CREF possesses considerable expertise managing stable value portfolios

and our record is built on a robust infrastructure, beginning with

the extensive resources we allocate to maintaining a rigorous

system of credit research. This research is complemented by a

collection of highly experienced sector portfolio managers trained to

independently assess credit risk and other sources of risk across the

multiple asset classes that are part of stable value portfolios.

Right time for stable value Well-managed stable value portfolios represent a smart

investment option in all market environments. But in an era marked by economic uncertainty and heightened market turbulence, stable value portfolios are even more attractive ? offering a guarantee of principal and delivering steady returns with low levels of volatility. n

Lisa Black is Senior Managing Director and Head of Global Public Markets for the TIAA-CREF. Ms. Black is responsible for overseeing all of the organization's public fixed-income investments, including government, agency, sovereign, credit, structured and derivative instruments. In addition, she serves as Head of public fixed-income portfolio management for the TIAA-CREF. She is also responsible for overseeing and directing all fixed-income portfolio management

activities. Previously she was the Head of public-fixed income trading. Prior to that, Ms. Black has held other roles at TIAA-CREF, including manager of the Public Market Mortgage and Asset-Backed group. She joined the TIAA-CREF organization in 1987.

Philip T. Maffei II is a senior director responsible for product oversight of the TIAA Stable Value, TIAA Stable Return Annuity and Separate Account GIC programs. Mr. Maffei is responsible for designing, manufacturing, managing and supporting stable value products across multiple product types, distribution channels and end-user customers. Mr. Maffei joined the TIAA-CREF organization in 2007. He has 18 years of varied experience with products that seek to preserve principal and provide stable returns.

1 Stable Value Funds Performance Analysis, David F. Babbel, Professor, Wharton School and CRA International, and Miguel A. Herce, Ph.D., CRA International, April 2008.

2 The Hueler Analytics Pooled Fund Universe ("Universe") is provided by Hueler Analytics, a Minnesota-based data and research firm, which has developed the Universe for use as a comparative database to evaluate collective trust funds and other pooled vehicle with investments in GICs and other stable value instruments. The Universe is comprised of pooled stable value funds with common investment objectives of stability of principal; the number of participating funds in the Universe may vary over the different historic periods. Total return performance is calculated by taking the straight average of the monthly returns of the funds participating in the Universe during each month which are then linked to derive the index returns for all other time periods. Universe rates of return are reported gross of management fees and net of contract fees. All performance figures for periods over one year are annualized.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results.

TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association? (TIAA?). Teachers Advisors, Inc., is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).

Stable Value products are guaranteed insurance contracts and are not investments for Federal Securities Law purposes. Guarantees are subject to the claims-paying ability of the issuing insurance company.

C4707

CONTACT INFORMATION

Terry Buckley Director, Institutional Business Development TBuckley@tiaa- 415 882-3706 tiaa-

Stable Value Portfolios: Low-Risk Investments in a High-Risk Era ? Co-Published by TIAA-CREF ? 2

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