Stable Value Interest Fund Returns Explained

By Mitchell J. Smilowitz, CPA

The JRB Stable Value Interest Fund (SVIF) has three objectives:

• Preserve principal
• Minimize the effect of volatility
• Provide a guaranteed rate of return

Over the last 10 years, the Fund has succeeded in achieving these goals with returns that have generally out-paced the returns of money market funds. Stable value funds have generally outperformed money market funds by an annualized margin of 1.41% over the last 25 years.

As you can see, the SVIF provided superior returns over 3-years, 5-years and 10-years. Why has the Fund’s performance lagged money markets recently? What are the long-term prospects for the Fund?

How the Stable Value Interest Fund Works

The SVIF is managed by Galliard Capital Management, one of the largest stable value and fixed income managers in the U.S. Each quarter Galliard sets the interest rate that is credited for the Fund. This rate of return is guaranteed for the quarter. SVIF invests in high quality, investment grade, short-term (less than three years) government, corporate, mortgage-backed and asset-backed securities. About 87% of the Fund’s investments are rated A or higher, with 62% rated AAA. Your investment in the Stable Value Interest Fund, both principal and interest, is guaranteed through contracts with four highly rated insurance companies.

SVIF generally out-performs money market funds because it invests in bonds with a longer term (three years) than money market funds (typically 1-year or less). Longer term bonds generally command higher yields because investors demand better returns for locking up their capital for a longer period.

Why Are Stable Value Interest Fund Yields Currently Lower than Money Market Yields?

During periods when short-term interest rates rise rapidly, yields of longer-term bonds may lag. In order to combat inflation, the Federal Reserve raised short-term interest rates by more than 5.00% from March 2022 to July 2023. This has led to an interest rate “inversion” where short-term bonds exceed the yield on longer term bonds.

What Is the Long-Term Outlook for the Stable Value Interest Fund?

There are good reasons to expect that the advantage currently enjoyed by money market funds will be temporary. SVIF’s ability to invest in longer maturity assets diversified across the investment grade sectors of the bond market provides a more robust, diversified source of yield with less volatility than a money market fund. As the bonds held by the SVIF mature and it purchases new bonds at higher interest rates, we believe that the SVIF will regain its return advantage over money market funds.

The pendulum is already swinging back in favor of stable value. SVIF returns increased from 2.30% in the first quarter of 2023 to 2.90% in the fourth quarter.

In conclusion, stable value funds have consistently outperformed money market investments.  As the following chart shows, stable value funds have had higher returns than money market funds for all but 1 year of the past 20 years. 

During past periods of rising rates, stable value investments have generally delivered on their primary objective of providing principal preservation and a competitive yield versus other low-risk alternatives. There is every reason to expect that the current interest rate inversion is temporary and that Stable Value Interest Fund returns will gradually exceed those of money market funds. Indeed, the process is already underway.

October 2023