401k: Stable Value vs. Intermediate-Term Bond Fund

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
CoderDude
Posts: 178
Joined: Mon Aug 04, 2008 8:19 pm

401k: Stable Value vs. Intermediate-Term Bond Fund

Post by CoderDude »

Which of the following 401k investment options would you choose?

Principal Fixed Income Stable Value
Yield: 2.75% from 1/1/11-6/30/11
Average Effective Duration: N/A
Average Effective Credit Quality: N/A
Expense Ratio: N/A

PIMCO Core Plus Bond I R3 Fund (PCIRX)
Yield: 2.12%
Average Effective Duration: 5.57
Average Effective Credit Quality: BBB
Expense Ratio: 1.16%

Principal Bond & Mortgage Securities R3 Fund (PBMMX)
Yield: 3.12%
Average Effective Duration: 5.06
Average Effective Credit Quality: BB
Expense Ratio: 1.10%

The stable value fund is appealing, since the yield is currently competitive with the bond funds, yet the stable value fund is guaranteed to not lose principal. Plus, the bond funds have high expense ratios.

Thoughts?
Default User BR
Posts: 7502
Joined: Mon Dec 17, 2007 6:32 pm

Re: 401k: Stable Value vs. Intermediate-Term Bond Fund

Post by Default User BR »

CoderDude wrote:The stable value fund is appealing, since the yield is currently competitive with the bond funds, yet the stable value fund is guaranteed to not lose principal. Plus, the bond funds have high expense ratios.
It's useful to compare total return as well as yield. Just as a StV fund doesn't lose share price due to rising interest rates, it also doesn't gain due to falling rates. As an example, a Barclay's aggregate bond index fund had a total return for 2010 of about 6.5%. Mine sets the rate quarterly, and had an overall return of right around 3% for the year.

I like stable value, but you have to understand the features. I made the decision when I structured my current portfolio a few years ago to use 50/50 StV and Bond Index.



Brian
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: 401k: Stable Value vs. Intermediate-Term Bond Fund

Post by dbr »

Default User BR wrote:
CoderDude wrote:The stable value fund is appealing, since the yield is currently competitive with the bond funds, yet the stable value fund is guaranteed to not lose principal. Plus, the bond funds have high expense ratios.
It's useful to compare total return as well as yield. Just as a StV fund doesn't lose share price due to rising interest rates, it also doesn't gain due to falling rates. As an example, a Barclay's aggregate bond index fund had a total return for 2010 of about 6.5%. Mine sets the rate quarterly, and had an overall return of right around 3% for the year.

I like stable value, but you have to understand the features. I made the decision when I structured my current portfolio a few years ago to use 50/50 StV and Bond Index.



Brian
Exactly SV is a distinct investment type that typically has the interest rate risk of cash, the yield (hence the expected return) of intermediate bonds, and some measure of agency risk and lack of transparency (Although the history is that agency risk has almost never developed.) SV may lack liquidity and are only available in 401k and perhaps some other retirement plan options.

I think the choice is usually to have some of both; SV is not really interchangeable with any particular type of bond fund.
Topic Author
CoderDude
Posts: 178
Joined: Mon Aug 04, 2008 8:19 pm

Post by CoderDude »

Should the high expense ratios of the bond funds make the SV fund more attractive? If the bond fund was something like Total Bond Market (ER 0.12%), I would probably choose the bond fund. However, these bond funds have expense ratios over 1%.

The SV fund does not have a listed expense ratio -- I suppose the expenses are just rolled into the yield. But 2.75% seems competitive with the current yield for other SV funds.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Post by dbr »

CoderDude wrote:Should the high expense ratios of the bond funds make the SV fund more attractive? If the bond fund was something like Total Bond Market (ER 0.12%), I would probably choose the bond fund. However, these bond funds have expense ratios over 1%.

The SV fund does not have a listed expense ratio -- I suppose the expenses are just rolled into the yield. But 2.75% seems competitive with the current yield for other SV funds.
Sure the cost of the SV fund affects the yield, and they just choose not to publish it. Money market funds have the same sort of overhead.

There is nothing wrong in general with putting money in SV funds in a 401K. A good question for you is do you know how the SV money is invested and to you understand what you have in that investment?

At Megacorp the SV fund has a last year return of 3.47%, an ER of 0.22, and is invested 90% in synthetic GIC's and 10% in cash. I don't think it is easily possible to ascertain in detail what those GIC's are and with what insurers.

I personally would limit my allocation to such a fund to not be a majority of fixed income investment because it is too hard to understand what one has.
Default User BR
Posts: 7502
Joined: Mon Dec 17, 2007 6:32 pm

Re: 401k: Stable Value vs. Intermediate-Term Bond Fund

Post by Default User BR »

dbr wrote:SV may lack liquidity and are only available in 401k and perhaps some other retirement plan options.
This is a good point. Before you use a stable-value fund, find out what restrictions your plan might have as far as moving money in and out of it.



Brian
Post Reply