stable value fund vs VIPSX-which one safer during market turmoil?

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jjwpls
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stable value fund vs VIPSX-which one safer during market turmoil?

Post by jjwpls » Sun Mar 01, 2020 4:39 pm

Hi Everyone,

Because of the recent market turmoil, I am considering allocating some of new contributions to my 401k account into two relatively safe options available (there is no money-market fund, or short-term/intermediate-term bond index fund available in the plan):

(1) Vanguard's Inflation Protected Securities Fund (VIPSX)
(2) the stable value fund (Key Guaranteed Portofliio Fund) provided by the plan.

In your opinion, which one of the two will be better in keeping the value of new investments?

More than 80% of VIPSX's portfolio is government-issued inflation-index bonds. The interest rate risk associated with VIPSX is high, but in theory, even in the worst case scenario (e.g., financial market meltdown) Uncle Sam should still be able to make payments to bond holders and avoid default.

By contrast, I know little how the stable value fund works. The documentation shows that the majority of the assets is bonds. But as I look into the breakdown of the bond investments (p.2), none of the biggest investments sound familiar to me, such as "Unaffiliated non-US securities" (the largest bond investment) and "CMOs and REMICs-privately issued" (2nd largest bond investment).

Could you decipher for me in general how the stable value fund works, and does it provide a safer alternative to government-issued bonds during market turmoil? Thanks so much.

jjwpls

Northern Flicker
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by Northern Flicker » Sun Mar 01, 2020 4:57 pm

The stable value fund should be viewed as an actively managed bond portfolio where you give up some of the yield to an insurance company in return for them absorbing term risk and credit risk. There usually are triggering events that can lead to withdrawals being done at market value, and the insurance company could become insolvent and not be able to cover a portfolio loss. The tail risk of the SVF is thus the tail risk of the underlying portfolio.
Risk is not a guarantor of return.

alex_686
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by alex_686 » Sun Mar 01, 2020 5:14 pm

Its a safe alternative. It is a insurance product.

The general plan is to buy illiquid bonds. Illiquid bonds offer a higher yield because they are not liquid. Since it is in a stable value fund, liquidity needs is much lower. A example would be collateralized mortgage obligation, which is probably some private (non-traded) bond on a building.

They then buy protection from the parent insurance company to guaranty the returns. The insurance company would then go out and buy options or enter into future contacts to hedge. Note, the stable value’s insurance premium is classified as a expense, but the mutual fund’s premium to put s protective put is not, even though it is a equivalent action.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

dbr
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by dbr » Sun Mar 01, 2020 6:06 pm

Your question has an apples and oranges character. You talk about maintaining value and obviously with interest rate risk and also liquidity risk a TIPS fund simply doesn't maintain value the same way an insurance backed product written to maintain value does. Stable value means stable value. Of course the failure to maintain value in the TIPS fund could mean gaining value in a flight to safety and a fall in real interest rates.

On the other hand we are a million miles away from imagining defaults on US Treasuries while any single stable value fund in a 401k is only as good as the insurance companies behind it and the idiosyncratic risk of any particular fund. There is not much history of problems in stable value funds but it has happened that funds have frozen or did not pay back 100%, at least not immediately. There was a thread about that on the forum sometime in the last year. Of course, if the fund in question is something like the NY Teachers 7.5% fixed income fund, that is on the shoulders of New York City taxpayers under duress of the New York State Legislature. I don't know how safe that fund is.

I think market turmoil or not I would be happy to be in a US Treasury fund as a long term investment holding. No bond fund of intermediate duration is suitable as a short term investment holding.

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Phineas J. Whoopee
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by Phineas J. Whoopee » Tue Mar 03, 2020 4:03 pm

Stable value funds are engineered to maintain a value of one dollar per share, but the design doesn't always work as one might expect. That's not me saying to stay away from them. It is me non-originally saying understand what you're investing in.

There are two fundamental designs of stable value funds: Guaranteed Investment Contracts (GICs); and Synthetic GICs.

In the first the 401(k) plan (or whatever, but it's always tax advantaged) signs a contract with an insurance company, or perhaps more than one. The employees' money goes into the insurer's general fund, at a promised interest rate. One is exposed to the insurer.

In the second the plan buys short- to intermediate-term bonds, and contracts with one or more insurance companies to guarantee value and yield, in return for a premium. An investor is exposed to the insurer(s), and to the bond issuers. That situation is in fact safer over the long term. Should an insurer collapse the underlying bonds are still held by the fund, and eventually can be expected to mature. Insurers also have contracted conditions under which they don't have to pay. The underlying bonds still exist.

In both cases the terms and conditions typically include provisions saying the plan can delay payment. There's little risk of capital loss (but more than none). The main risk is liquidity. I had one, for example, where the plan could limit withdrawals to ten percent of the value per year, for ten years.

Stable value funds can be good things to include in a portfolio, where available, but in my opinion should not be bought blindly.

PJW

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jjwpls
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by jjwpls » Tue Mar 03, 2020 5:26 pm

Thank you all for you replies!

CT-Scott
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by CT-Scott » Sat Apr 18, 2020 10:50 am

If you don't mind me bumping/hijacking this thread a bit, can someone please evaluate the pros/cons of the following 401k options, if protection/preservation is one's primary goal:

My 401k (Fidelity):

A1) Stable Value Fund: Wells Fargo Stable Value Fund Class M
36.50% - CORPORATE/TAXABLE MUNICIPAL SECURITIES
25.70% - MORTGAGE BACKED SECURITIES (MBS)
15.40% - U.S. TREASURY/AGENCY
11.00% - ASSET BACKED SECURITIES (ABS)
6.50% - OTHER U.S. GOVERNMENT
4.90% - CASH/EQUIVALENTS
* Note: there are more details I can grab about these, so if I'm not including details that you think are important, let me know and I can see if that info is available

A2) ABTIX - American Century Government Bond Fund R5 Class

A3) VSIGX - Vanguard Intermediate-Term Treasury Index Fund Admiral Shares

A4) VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares

A5) WACSX - Western Asset Core Bond Fund Class IS

* There is also a "World Bond" fund (HFARX), which I didn't bother listing, because I'm assuming it's not as "safe", but feel free to comment on this one, too.

**********

My wife's 401k (Prudential):

B1) Stable Value Fund: Fixed Income Fund
33% - CIGNA Stable Value
25% - Prudential Guaranteed Long Term Fund
25% - Prudential Stable Value Fund
17% - MassMutual SYNGIC

B2) High Yield Bond / Prudential Fund
Top 5 sectors:
81.22% - High Yield
6.19% - ABS
2.23% - Private Corp Inv Grade
1.90% - Emerging Markets
0.17% - International
* This is apparently the only bond fund available in my wife's 401k and, if I'm reading it right, it consists largely of corporate junk bonds. It states the following:
The Separate Account (the “Fund”) seeks to provide at least 200 bps of excess return over its benchmark over a full market cycle (typically five to seven years), by identifying high yield investments through a disciplined, relative value approach.
There is no assurance the objectives will be met.
Fixed income investment (bond) funds are subject to interest rate risk; their value will decline as interest rates rise. Fund shares are not guaranteed by the U.S. Government. High yield "junk" bonds involve a greater risk of default of payment of principal and interest than higher-rated bonds. Also, these bonds tend to be less liquid than higher-rated securities. Therefore, an investment in the Fund may not be appropriate for short-term investing.

CT-Scott
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by CT-Scott » Sat Apr 18, 2020 12:18 pm

BTW, here's a good article/interview I found discussing Stable Value funds:

Stable value: A safe harbor
https://institutional.vanguard.com/VGAp ... SafeHarbor

Unfortunately, it doesn't seem to discuss any of the major risks that some have described.

pascalwager
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Re: stable value fund vs VIPSX-which one safer during market turmoil?

Post by pascalwager » Sat Apr 18, 2020 2:46 pm

jjwpls wrote:
Sun Mar 01, 2020 4:39 pm

More than 80% of VIPSX's portfolio is government-issued inflation-index bonds. The interest rate risk associated with VIPSX is high, but in theory, even in the worst case scenario (e.g., financial market meltdown) Uncle Sam should still be able to make payments to bond holders and avoid default.
Not if you hold it for 5 to ten years. Your investment horizon just needs to (roughly) match the fund duration.
Retired, pension, no SS | Bond funds: TIPS, TBM | Global stocks: total market, large value, small company, emerging market funds

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