Stable Value Funds Today
the underlying strength developing in
the U.S. economy flows into higher
real growth this year. Household net
worth has largely recovered, quality
of consumer and corporate balance
sheets has improved significantly, and
gains in real GDP inputs are solid, so
it is our opinion that real growth has
upside potential relative to forecasts.
Because corporate balance sheets
are healthy, because consumers have
deleveraged, and because there is
increasing access to credit, I believe
real demand will support higher-thanexpected growth in 2014. Offsetting
higher interest rates is a tighter spread
environment, so that increasing earned
rates in a portfolio will be a very gradual
outcome of rising Treasury rates. The
composition of SVF, as well as cash
flow generated from the SVF that will
participate in a rising rate environment,
are factors that also determine credited
rate movements.
Why SVF today?
An investor nearing retirement or in
retirement may want to preserve principal
and minimize risk. SVF may be more
appealing to this type of investor for
several reasons. Management fees for
SVF are typically less expensive than
those of bond mutual funds, SVF can
be used as a low-risk tool to diversify
overall portfolio risk, and credited rates
typically do not fall below 0 percent.
The SVF crediting rate smoothing
formula relative to the actual return
earned on a bond mutual fund, which
can be negative in a rising interest
rate environment, may also be more
appealing for these types of investors.
In a rising rate environment, managing
duration exposure and cash flow
reinvestment is critical to performance.
With an improving economy as a
backdrop, the Federal Reserve Board
taper program underway and the Fed
Funds rate expected to increase in 2015,
opportunities to increase yield and
SVF credited rates will grow. Current
positioning is important so that cash
and SVF cash flows can be targeted
to these opportunities, participate in
the higher rate environment, and grow
asset balances over time. n
Catharine Tocher is the Senior Vice President
& Chief Investment Officer, Separate Accounts
at Great-West Financial®
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