Stable Value Fund versus Money Market Fund Yields through Interest Rate Cycles

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The primary objective of stable value and money market funds is capital preservation. Both use book value accounting (technically called “amortized cost” in the case of a money market fund) that values assets each day at principal plus accrued interest. Generally, both types of funds invest in securities that have a similar credit quality. The book valuation of stable value funds is explicitly backed by investment contracts issued through financial institutions. Money market funds’ amortized cost accounting is maintained as long as the underlying market value (or “shadow net asset value”) does not fall more than 50 basis points below the daily amortized cost value. The biggest difference between the two, however, is the maturity of the underlying investments. Whereas money market funds typically have an average maturity of 30 to 45 days, stable value funds usually have a 3.0 to 3.5-year average maturity. The ability to invest in longer-dated, higher-yielding assets has historically provided stable value funds a return advantage compared to money market funds.

In most interest rate environments, investors face a positively sloped yield curve in which they receive higher incremental yields (and greater returns) the longer the maturity of a fixed income security. The more positively sloped a yield curve, the greater the advantage of a stable value fund relative to a money market fund. At the same time, the more a stable value fund or money market fund manager extends maturity, the less responsive the portfolio’s crediting rate will be to changes in interest rates.  This is a tradeoff between yield and responsiveness to movements in interest rates.

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