My Personal Finance Journey

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Stable-Value Mutual Funds May Die

Contributed by mm | August 20, 2004 7:56 AM PST

Today's WSJ reported that stable value mutual funds may have to close the door or reinvent themselves due to an ongoing SEC inquiry.

Stable value funds are a niche type of investment. It delivers intermediate-bond-like returns (much better than money market yields) and, most importantly, using third-party insurance to guarantee the invested principal. As a matter of fact, no stable value fund has ever dealt a principal loss for its investors. Too good to be true?

Actually stable value funds are quite common in 401(k) plans. According to the same WSJ article, up to $355 billion is currently invested in such funds. Such funds in 401(k) are not impacted; the SEC inquiry is only affecting those funds that are selling to retail customers outside of 401(k) plans.

I have been watching stable value funds for several months. I put most of such funds, namely NMIRX, OCPNX, PBCPX and DFPIX into my MSN Money Portfolio and watch them frequently. They all trade at exactly $10 day by day, and distribute dividends regularly.

My original intention to consider stable value funds is to squeeze some more gains out of my savings (which earns approximately 2.15% in my VirtualBank account). As many of these funds deliver around 4%, it will be

Earlier this year, I spent quite some time to read some prospectus: many of such principal-guarantee insurance are coming from big names like AIG, Bank of America and JP Morgan Chase. Since the total size of all retailer stable-value mutual funds is only $6 billion, and since these funds mostly invest in high-quality short-term bonds (short-term limits price volatility in bond prices), there is no reason to doubt these insurances cannot deliver when principal is in real danger. The other risk is in credit risk (which insurance does not cover -- insurance only covers interest rate risk), but for AAA-grade short-term bonds, such risk is next to nil.

Anyway, you all know I didn't make the final step to purchase such funds, otherwise you will see me mentioning this topic much earlier. I am a little bit concerns about the SEC inquiry -- if the fund I buy needs to redefine itself to be another intermediate bond fund, I'd better be sitting in high-yield saving accounts. There are also some restrictions in switch to and out of such funds in retirement accounts.

By the way, to boost the return on savings while preserving the (relative) safety of principals, I am also considering bank loan funds. I will discuss that topic in depth when I am ready.

(Some other stable value investment readings:

BusinessWeek: Searching for Safety in Stable-Value Funds
MorningStar: The Emergence of Stable Value
Bankrate: Stabilize Your Retirement Account)

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