Federated Investors last week became the latest fund adviser to introduce a stable value fund, a move which comes as investors increasingly are looking for the stability of money market fund- style investments.
Federated's Ultrashort Bond fund will seek yields higher than money market funds while trying to keep fluctuations in the fund's $2 per share net asset value (NAV) to a minimum. Federated joins several other fund advisers who in recent weeks have begun offering stable value funds, so named because fund managers try -- but do not promise -- to keep fund NAVs constant. Bankers Trust in September introduced BT Preservation Plus, a stable value fund for retirement accounts. And last month, Dreyfus filed a registration statement with the SEC for a stable value product, the Dreyfus Retirement Income Fund.
Stable value funds are hybrids of money market funds and bond funds, investing in a mix of highly-rated government securities and corporate bonds. The corporate bonds have higher yields than government securities but carry a greater risk of payment default. Unlike money market funds, the stable value funds do not fix their NAVs at $1.00 per share.
"I think we're hitting the market at a pretty opportune time," said Randall S. Bauer, the Ultrashort Bond fund's lead portfolio manager.
Bauer said the fund should be attractive to investors looking for a conservative investment but prepared to take more risk than that in a money market fund investment. Unnerved by erratic performance in financial markets since July, investors increasingly have put assets in money market funds. Investors added $60 billion to money market funds in October, according to IBC Financial Data of Ashland, Mass., which tracks performance and asset sales for money market funds. The previous record for money market fund investments -- $50 billion -- was set in August, said Peter Crane, managing editor of IBC's Money Fund Report.
"The timing is definitely right on this product," Crane said of stable value funds. "It's actually a perfect (economic) environment."
Yields on money market funds are around 4.5 percent, Crane said. As investors continue to worry about market turmoil and as they seek to balance their highly-appreciated equity investments with fixed income investments, some will be looking for stable investments with a little bit higher return than money market funds provide, Crane said. Funds which offer relative stability and a slightly higher yield than the typical money market fund should be attractive for investors, he said.
That is what Federated hopes. The Ultrashort Bond fund will carry "a little bit more credit risk" and interest rate risk than a money market fund, Bauer said. But it is intended to provide a better total return, he said.
Federated is based in Pittsburgh. The firm has approximately $109 billion in assets under management, with approximately $74 billion of that in money market funds, Bauer said.
Crane said Federated's new fund may hold an additional appeal for risk-averse investors. Federated has a reputation for conservative investing, he said. Based on its track record, the company appears unlikely to take undue risk to improve the Ultrashort Bond fund's return, Crane said.