IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v6y2018i1p12-d132609.html
   My bibliography  Save this article

Stable Value Funds Performance

Author

Listed:
  • David F. Babbel

    (The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6302, USA)

  • Miguel A. Herce

    (Principal of Charles River Associates in Boston, Boston, MA 02116-5092, USA)

Abstract

Little in the scholarly economics literature is directed specifically to the performance of stable value funds, although they occupy a leading place among retirement investment vehicles. They are currently offered in more than one-third of all defined contribution plans in the USA, with more than $800 billion of assets under management. This paper rigorously examines their performance throughout the entire period since their inception in 1973. We produce a composite index of stable value returns. We next 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 (on average) two major asset classes based on a historical analysis, and that they often occupy a significant position in optimized portfolios across a broad range of risk aversion levels. We discuss factors that contributed to stable value funds’ past performance and whether they can continue to perform well into the future. We also discuss considerations regarding whether or not to include stable value as an element in target date funds within defined contribution pension plans.

Suggested Citation

  • David F. Babbel & Miguel A. Herce, 2018. "Stable Value Funds Performance," Risks, MDPI, vol. 6(1), pages 1-40, February.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:1:p:12-:d:132609
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-9091/6/1/12/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-9091/6/1/12/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
    2. Huberman, Gur & Ross, Stephen, 1983. "Portfolio Turnpike Theorems, Risk Aversion, and Regularly Varying Utility Functions," Econometrica, Econometric Society, vol. 51(5), pages 1345-1361, September.
    3. Christopher J. Malloy & Tobias J. Moskowitz & Annette Vissing‐Jørgensen, 2009. "Long‐Run Stockholder Consumption Risk and Asset Returns," Journal of Finance, American Finance Association, vol. 64(6), pages 2427-2479, December.
    4. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2010. "Are Risk Aversion and Impatience Related to Cognitive Ability?," American Economic Review, American Economic Association, vol. 100(3), pages 1238-1260, June.
    5. Ilia D. Dichev, 2007. "What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns," American Economic Review, American Economic Association, vol. 97(1), pages 386-401, March.
    6. Robert R. Grauer and Nils H. Hakansson., 1987. "Gains from International Diversification: l968-85 Returns on Portfolios of Stocks and Bonds," Research Program in Finance Working Papers 168, University of California at Berkeley.
    7. Hakansson, Nils H., 1974. "Convergence to isoelastic utility and policy in multiperiod portfolio choice," Journal of Financial Economics, Elsevier, vol. 1(3), pages 201-224, September.
    8. Grauer, Robert R & Hakansson, Nils H, 1986. "A Half Century of Returns on Levered and Unlevered Portfolios of Stocks, Bonds, and Bills, with and without Small Stocks," The Journal of Business, University of Chicago Press, vol. 59(2), pages 287-318, April.
    9. Babbel, David F. & Herce, Miguel A., 2011. "Stable Value Funds: Performance to Date," Working Papers 11-01, University of Pennsylvania, Wharton School, Weiss Center.
    10. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    11. Christian Pedersen & Stephen Satchell, 2002. "On the foundation of performance measures under asymmetric returns," Quantitative Finance, Taylor & Francis Journals, vol. 2(3), pages 217-223.
    12. MOSSIN, Jan, 1968. "Optimal multiperiod portfolio policies," LIDAM Reprints CORE 19, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Tang, Ning & Mitchell, Olivia S. & Mottola, Gary R. & Utkus, Stephen P., 2010. "The efficiency of sponsor and participant portfolio choices in 401(k) plans," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1073-1085, December.
    14. Ross, Stephen A., 1974. "Portfolio turnpike theorems for constant policies," Journal of Financial Economics, Elsevier, vol. 1(2), pages 171-198, July.
    15. Fred D. Arditti, 1967. "Risk And The Required Return On Equity," Journal of Finance, American Finance Association, vol. 22(1), pages 19-36, March.
    16. Robert R. Grauer & Nils H. Hakansson, 1995. "Gains From Diversifying Into Real Estate: Three Decades of Portfolio Returns Based on the Dynamic Investment Model," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(2), pages 117-159, June.
    17. Jakša Cvitanić & Vassilis Polimenis & Fernando Zapatero, 2008. "Optimal portfolio allocation with higher moments," Annals of Finance, Springer, vol. 4(1), pages 1-28, January.
    18. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R., 2007. "Participant reaction and the performance of funds offered by 401(k) plans," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 249-271, April.
    19. Robert R. Grauer & Nils H. Hakansson, 1993. "On the Use of Mean-Variance and Quadratic Approximations in Implementing Dynamic Investment Strategies: A Comparison of Returns and Investment Policies," Management Science, INFORMS, vol. 39(7), pages 856-871, July.
    20. Hakansson, Nils H, 1971. "On Optimal Myopic Portfolio Policies, With and Without Serial Correlation of Yields," The Journal of Business, University of Chicago Press, vol. 44(3), pages 324-334, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sheng-Ping Yang & Thanh Nguyen, 2019. "Skewness Preference and Asset Pricing: Evidence from the Japanese Stock Market," JRFM, MDPI, vol. 12(3), pages 1-10, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Grauer, Robert R. & Hakansson, Nils H., 1995. "Stein and CAPM estimators of the means in asset allocation," International Review of Financial Analysis, Elsevier, vol. 4(1), pages 35-66.
    2. Michael J. Best & Robert R. Grauer, 2017. "Humans, Econs and Portfolio Choice," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-30, June.
    3. Grauer, Robert R. & Shen, Frederick C., 2000. "Do constraints improve portfolio performance?," Journal of Banking & Finance, Elsevier, vol. 24(8), pages 1253-1274, August.
    4. Hagelin, Niclas & Pramborg, Bengt, 2004. "Dynamic investment strategies with and without emerging equity markets," Emerging Markets Review, Elsevier, vol. 5(2), pages 193-215, June.
    5. Grauer, Robert R., 2013. "Limiting losses may be injurious to your wealth," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5088-5100.
    6. Darong Dai, 2014. "The Long-Run Behavior of Consumption and Wealth Dynamics in Complete Financial Market with Heterogeneous Investors," Journal of Applied Mathematics, Hindawi, vol. 2014, pages 1-16, July.
    7. Paolo Guasoni & Constantinos Kardaras & Scott Robertson & Hao Xing, 2014. "Abstract, classic, and explicit turnpikes," Finance and Stochastics, Springer, vol. 18(1), pages 75-114, January.
    8. Guasoni, Paolo & Muhle-Karbe, Johannes & Xing, Hao, 2017. "Robust portfolios and weak incentives in long-run investments," LSE Research Online Documents on Economics 60577, London School of Economics and Political Science, LSE Library.
    9. Scott Robertson & Hao Xing, 2014. "Long Term Optimal Investment in Matrix Valued Factor Models," Papers 1408.7010, arXiv.org.
    10. Levy, Haim & Levy, Moshe, 2021. "The cost of diversification over time, and a simple way to improve target-date funds," Journal of Banking & Finance, Elsevier, vol. 122(C).
    11. Bianjun Xia, 2011. "A simple explanation of some key time preference anomalies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(2), pages 695-708, May.
    12. Fong, Wai Mun & Lean, Hooi Hooi & Wong, Wing Keung, 2008. "Stochastic dominance and behavior towards risk: The market for Internet stocks," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 194-208, October.
    13. Giorgio Consigli & Vittorio Moriggia & Sebastiano Vitali, 2020. "Long-term individual financial planning under stochastic dominance constraints," Annals of Operations Research, Springer, vol. 292(2), pages 973-1000, September.
    14. Chan, Raymond H. & Chow, Sheung-Chi & Guo, Xu & Wong, Wing-Keung, 2022. "Central moments, stochastic dominance, moment rule, and diversification with an application," Chaos, Solitons & Fractals, Elsevier, vol. 161(C).
    15. Post, Thierry & van Vliet, Pim, 2006. "Downside risk and asset pricing," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 823-849, March.
    16. Sheng-Ping Yang & Thanh Nguyen, 2019. "Skewness Preference and Asset Pricing: Evidence from the Japanese Stock Market," JRFM, MDPI, vol. 12(3), pages 1-10, September.
    17. Paolo Guasoni & Johannes Muhle-Karbe & Hao Xing, 2013. "Robust Portfolios and Weak Incentives in Long-Run Investments," Papers 1306.2751, arXiv.org, revised Aug 2014.
    18. Blomvall, Jorgen & Lindberg, Per Olov, 2003. "Back-testing the performance of an actively managed option portfolio at the Swedish Stock Market, 1990-1999," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 1099-1112, April.
    19. Robert R. Grauer and Nils H. Hakansson., 1998. "Applying the Grinblatt-Titman and the Conditional (Ferson-Schadt) Performance Measures: The Case of Industry Rotation Via the Dynamic Investment Model," Research Program in Finance Working Papers RPF-277, University of California at Berkeley.
    20. Kang, Taehoon & Wade Brorsen, B. & Adam, Brian D., 1996. "A new efficiency criterion: The mean-separated target deviations risk model," Journal of Economics and Business, Elsevier, vol. 48(1), pages 47-66, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jrisks:v:6:y:2018:i:1:p:12-:d:132609. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.