Stable Value Funds: Performance to Date

51 Pages Posted: 5 Jan 2011

See all articles by David F. Babbel

David F. Babbel

University of Pennsylvania - The Wharton School - Finance and Insurance Departments; CRA International

Miguel Herce

CRA International, Inc.

Date Written: January 1, 2011

Abstract

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

Babbel, David F. and Herce, Miguel, Stable Value Funds: Performance to Date (January 1, 2011). Available at SSRN: https://ssrn.com/abstract=1734991 or http://dx.doi.org/10.2139/ssrn.1734991

David F. Babbel (Contact Author)

University of Pennsylvania - The Wharton School - Finance and Insurance Departments ( email )

215 Wakefield Road
Bryn Mawr, PA 19010
United States
610-527-1839 (Phone)

CRA International ( email )

John Hancock Tower
200 Clarendon Street, T-33
Boston, MA 02116-5092
United States
610-527-1839 (Phone)

Miguel Herce

CRA International, Inc. ( email )

1201 F. St. NW
Ste. 700
Washington, DC 20004
United States

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