#09-25
Stable Value Funds: Performance from 1973 through 2008
David F. Babbel and Miguel A. Herce, September 2009
Abstract:There is a paucity of academic literature on stable value funds, although they occupy
such a prominent place among retirement investment vehicles. They are
offered in roughly one half of all defined contribution plans in the USA, with close
to a trillion dollars worth of assets under management. This paper is the first to
rigorously examine their performance throughout the entire period since their inception
in 1973. We produce the first comprehensive 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
occupy a prominent 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 continue to maintain it into the future.
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 classifications: G11, G22, G23, J26.
