Stable value offered as safer IRA option

Mutual Funds

Mutual Funds

January 10, 1999|By Kathy Bergen | Kathy Bergen,CHICAGO TRIBUNE

Are American investors, particularly aging baby boomers, tiring of the stock market's rock 'n' roll?

Could it be they're ready to add a slow, steady waltz or two to their investment lineup?

A handful of investment firms are betting on it by bringing a longtime staple in employer-sponsored retirement plans -- the stable value fund -- to the retail mutual fund market as an investment option for individual retirement accounts.

One fund launched two weeks ago and at least four more are awaiting approval from the Securities and Exchange Commission.

"We've just experienced a return to stock market volatility, and those market swings, along with the aging of the baby boomers who need some portion of their retirement savings to be safe and steady, is why we're seeing stable value push up," said Gina Mitchell, president of the Stable Value Investment Association in Washington.

Stable value funds in the mutual fund world will look a little different from their brethren in the 401(k) retirement plan universe, which have been yielding an average of 6.4 percent annually over the past five years.

The mutual funds will invest in intermediate-term fixed-income vehicles, such as corporate bonds, mortgage-backed securities and Treasury securities. The portfolios are then wrapped with insurance policies that protect the principal against market fluctuations. The added costs for managing retail accounts and for the insurance protection will whittle yield levels a bit.

As well, legal and accounting issues preclude the mutual funds from investing in guaranteed investment contracts, a popular stable-value option in many 401(k) plans.

If the funds operate as expected, share price will remain constant, as it does with money market funds, but investors should receive a yield that over the long term is 1.5 to 2 percentage points greater than on money market funds. The goal is money market stability with the higher yield of intermediate-term bond funds.

"I think they are going to have a lot of appeal because, conceptually, they sound good," said Eric Jacobson, fixed-income editor for Morningstar Mutual Funds.

"You get an investment in intermediate-term bonds without the risk of principal movement."

Nevertheless, he said he's in a "wait-and-see" mode with regard to the funds for a number of reasons, one being the price tag for investing in such funds.

The first fund out of the box -- BT PreservationPlus Income Fund, opened by New York-based Bankers Trust -- has an expense ratio of 1.25 percent. And that may prove typical.

Of that amount, 1.05 percent represents fees for the fund. Portfolio manager Eric Kirsch says this is in line with fees charged on other intermediate bond funds. The other 0.20 percent is for the insurance, he said, noting this is not a lot of money for investors "who prefer to sleep at night."

Morningstar's Jacobson views it differently.

"For a low-volatility, relatively low-return fund, that's a fairly steep price tag," he said, noting that expense ratios on some bond funds are as low as 0.30 percent.

In fact, the fund hopes to enhance returns beyond benchmark indexes by using futures and options on futures.

Whether this can be done successfully and without scaring off the insurers remains to be seen, Jacobson said.

Use of derivatives "raises a red flag," he said. "These markets tend to be volatile."

Investors also should be aware that the insurance wrapper only protects against share price fluctuation, not against any defaults by bond issuers or fund insurers.

As with any mutual fund investment, it pays to check out the fund's holdings for quality and diversification, noted Kelli Hustad Hueler, president of Minneapolis-based Hueler Cos., which tracks the stable value industry.

While stable value funds have been a major component of many employer-sponsored retirement plans for about 15 years, they have lost market share to equity mutual funds because of the outstanding returns produced by the long-running bull market.

Now, with the stock market on the mend after a rocky third quarter, and with interest rates stuck at low levels, one has to wonder about the potential appeal of a new fixed-income product.

But Kirsch of Bankers Trust sees huge potential in the $1.5 trillion IRA market regardless of economic environment, noting that $60 billion of the total IRA market is invested in money market funds and $210 billion in certificates of deposit.

Pub Date: 1/10/99

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