What Is a Stable-Value Portfolio?
A stable-value fund protects the investment against a loss in the value of the principal. Stable-value funds also guarantee a minimum rate of return on the investment.
Stable-value portfolios are a popular 529 plan investment option for conservative investors. They can also be used for the low-risk portion of an asset allocation. Stable-value portfolios offer principal safety and liquidity similar to a money market fund, but pay bond-like interest.
Stable-value portfolios generally invest in guaranteed investment contracts or GICs.
Traditional GICs, which are issued by insurance companies, guarantee principal and a fixed or floating rate of interest for a specified period of time. For instance, the “Guaranteed Option” found in many of the TIAA-managed 529 savings programs consists of a funding agreement between the program and the TIAA Life Insurance Company. The contract’s guarantees are backed solely by the issuer’s faith and credit.
A second type of stable-value portfolio features something known as a synthetic GIC. Under a synthetic structure, the portfolio may invest in a single asset or, more commonly, in a portfolio of fixed-income securities. The fixed-income portfolio is then “wrapped” by a contractual agreement from one or more banks, insurance companies or other financial institutions that provide stable returns through a mechanism that amortizes market gains and losses over the life of the contract and applies a crediting rate to the portfolio. The crediting rate mechanism ensures a pass-through of the portfolio’s investment performance. The contract also typically offers principal safety through a “floor” guarantee that ensures the crediting rate will not fall below a pre-determined level, as well as liquidity provisions to fund participant-initiated withdrawals regardless of the underlying value of the portfolio’s assets.
Stable-value funds are also offered as an investment option in retirement plan accounts.
A valuable resource for information about stable-value investments is the Stable Value Investment Association.
[Editor’s note: This article was originally published on July 22, 2003 and updated on October 21, 2020 by Mark Kantrowitz.]
A good place to start