Stable Value Funds: Performance to Date
51 Pages Posted: 5 Jan 2011
Date Written: January 1, 2011
Little in the scholarly economics literature is directed specifically to stable value funds, although they occupy a leading place among retirement investment vehicles. They are offered in almost half of all defined contribution plans in the USA, with more than $800 billion dollars worth of assets under management. This paper rigorously examines their performance throughout the entire period since their inception in 1973. We produce a composite index of stable value returns. We conduct mean-variance analysis, Sharpe and Sortino ratio analysis, stochastic dominance analysis, and optimal multi-period portfolio composition analysis. Our evidence suggests that stable value funds dominate two (and nearly three) major asset classes based on a historical analysis, and that they often occupy a significant position in optimal portfolios across a broad range of risk aversion levels. We discuss the factors that contributed to stable value’s remarkable performance and whether it can be maintained into the future. Although stable value funds have heretofore been largely restricted to U.S. savings plans, the results of our study have strong implications for their consideration in markets overseas. In our paper, innovations are achieved in constructing efficient stochastic dominance algorithms, incorporating return expectations in multi-period portfolio construction, and in examining the multi-relations among competing stable value funds.
Keywords: Stable value, defined contribution, optimal asset allocation, stochastic dominance
JEL Classification: G11, G22, G23, J26
Suggested Citation: Suggested Citation