For decades, money market funds were a go-to choice for advisors and clients looking for reliable capital cash preservation with some yield, albeit of the very modest variety.
Money market funds usually hold high-grade bonds with short maturities – 30 to 90 days in most cases – making this is a safe place to stash cash. However, it's not without its drawbacks, including some rising regulatory risk.
“US and EU regulators plan to adjust money market fund rules after coronavirus-related market turmoil caused an extreme flight to quality in March 2020, putting prime MMF liquidity under pressure, and triggering a drop in fund valuation,” notes Moody’s Investors Service.
Regulatory efforts usually take awhile to play out, but in the meantime, advisors can offer clients money market alternatives in the form of stable value funds – products offered by some of the biggest fund issuers and insurance companies, including Vangarud and the like.
“We have a higher credit quality bias within our underlying portfolios and we diversify across a high number of providers where other firms may have a more concentrated portfolio,” according to Vanguard. “Add on top of that, we are all internally managed, so our world-class risk management team has oversight of the entire portfolio and process.”
History Sides with Stable Value Funds
Obviously, the name of the game with money market and stable value funds is capital preservation, not appreciation, but historical data confirm the latter offer more upside potential.
“Stable value funds historically have higher returns than their money market counterparts. In fact, Vanguard stable value products have outperformed money market funds over the long term in multiple market and rate environments,” notes Vanguard's Patricia Selim. “Stable value has outperformed money market funds by an average annual basis of 180 basis points over the last 10 years.”
The right stable value funds can offer clients a return profile consistent with short- or intermediate-term bonds while a money market fund is going to be more inline with ultra-short term fixed income fare.
“Vanguard stable value can provide returns on par with short- to intermediate-term bonds, but with the stability you generally see with money markets. That’s a very attractive risk/return profile,” adds Selim.
Those are positive traits for advisors to consider as regulators eye money markets.
“In February, the Securities and Exchange Commission published ten reform proposals for public comment,” notes Moody’s. “One of these is to remove the link between breaches of liquidity thresholds and the imposition of withdrawal restrictions. This would help reduce the risk of pre-emptive redemptions, and make it easier for prime and tax-exempt MMFs to deploy their liquid assets in periods of market stress, a credit positive.”
Why Stable Value Funds Matter to Advisors
Stable value funds are an important part of advisors' toolboxes for multiple reasons. First, data confirm that many defined contribution plans offer investors these funds. Second, this isn't an asset class that commands a lot of attention, meaning clients, broadly speaking, aren't likely to be well-versed in stable funds. Translation: There's substantial opportunity for advisors to bridge the gap for clients.
Advisors should be motivated regarding stable value funds because Vanguard data indicate clients will opt for stable value over money markets when given the choice.
With downside risk mostly eliminated in the stable value equation, advisors can rest easier knowing they've presented clients with a viable and likely superior alternative to money markets.
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