Stable value mutual funds, once only available to investors through defined contribution plans, are making their way into the retail mutual fund universe as fund companies target IRA and Keogh plan investors.

The UAM Dwight Capital Preservation Fund, which was introduced June 17, is the latest in a series of stable value funds to be started in recent months. The fund is managed by Dwight Asset Management of Burlington, Vt. Dwight is an affiliated investment company of United Asset Management.

In the past eight months, Bankers Trust of Boston, Securities Benefit Company of Topeka, Kan., and Morley Financial Services of Lake Oswego, Ore., have all launched stable value funds. OppenheimerFunds of New York is awaiting SEC approval for a new fund and Dreyfus Corp. of New York received approval for the Dreyfus Retirement Income Fund late last year but has not yet introduced it.

Although this is Dwight Asset Management's first mutual fund venture, the firm is no stranger to the world of stable value investing. Dwight has managed stable value investments for 24 years and currently manages more than $10 billion in separate accounts and co-mingled trusts. While Dwight has historically concentrated on stable value investing for the institutional marketplace, Dwight anticipates retail retirement plan investors will embrace the same concept.

A stable value fund is essentially an intermediate-term bond fund whose goal is to maintain steady net asset value price per share. To accomplish this, an insurance agreement, called a wrapper, is purchased from an insurance company or bank on behalf of the fund's portfolio securities. This insurance wrapper stabilizes the fund's net asset price if interest rate moves diminish the value of the fund's portfolio securities, said Eric Kirsch, chief investment officer of Bankers Trust Stable Value Fixed-Income Group. It costs between 20 and 35 basis points to provide a wrapper, Kirsch said.

Unlike money market funds which invest in short-term fixed-income securities with average maturities of 90 days or less, stable value funds invest in government, corporate, high-yield and municipal bonds with average maturities of two and one-half to three years, said Chris Jones, vice president of financial research and strategy at Financial Engines, an online investment advisory service company in Palo Alto, Calif. That longer maturity can translate into an extra two or three percent return for investors, say stable value fund sponsors.

But these lengthier maturities also make stable value funds far less liquid than money-market funds. Consequently, stable value fund sponsors have instituted hefty redemption fees of two to three percent of amounts redeemed to discourage short-term investors.

The Dwight fund was launched to capture the assets "of those investors aged 59 1/2 and older who have grown to love stable value funds in their 401(k) plans," said Laura Dagan, managing director of Dwight Asset Management and the fund's portfolio manager. In many cases, stable value funds were selected instead of money funds as an option for 401(k) plans because of their higher returns, said Kirsch. Consequently, money funds may be largely unknown investments to plan participants. Kirsch estimates that 90 percent of defined contribution plans offer stable value fund options while only three to five percent of plans offer money fund options.

"The demographics are leading this move into the market," said Dagan of Dwight. Baby boomers who have spent several years building up 401(k) plan assets are increasingly rolling over assets into IRAs when they change jobs, are laid off or retire. According to the Employee Benefit Research Institute (EBRI) in Washington, D.C., at the end of 1997, total assets held in all forms of IRAs reached a record $1.9 trillion. Savvy plan sponsors hope to capture a portion of the burgeoning IRA plan pie for themselves by offering a familiar fund to investors.

Despite the apparent logic of their appeal, stable value investments have actually been losing assets within 401(k) plans since 1992, according to new data released by Spectrem Group, a research and consulting firm in San Francisco. Equity offerings have taken up the slack, said Catherine McBreen of Spectrem (see accompanying chart.)

But the trend of 401(k) assets moving out of stable value funds and into equity funds is good for investors, said Dwight's Dagan. She suggests that employees, through increased education, have learned to let go of the security of placing all their assets in stable value funds. They are reallocating a smaller percentage, more like 15 percent to 20 percent of their overall holdings, to stable value products while increasing their allocations to more aggressive equity funds, she said.

Bankers Trust was the early pioneer in stable value funds, having brought the first one, the BT PreservationPlus Income Portfolio, to market this past October. Thus far, the fund has attracted only $6 million, said Kirsch of Bankers Trust. A privately labeled, intermediary-sold version of BT's stable value fund was created by Bankers Trust for The Security Benefit Company of Topeka, Kan. and launched in early May of this year.

This past February, Morley Financial Services, a stable value investment firm, introduced the Morley Capital Accumulation Fund. Morley is a wholly-owned subsidiary of Villanova Capital of Wayne, Pa., the investment management arm of Nationwide Mutual Insurance Company of Columbus, Ohio. Morley claims to be the first registered investment adviser devoted exclusively to the management of stable value assets.

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