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SVF Managers Prep for Interest Rate Rise

The question of what happens when interest rates rise has a serious impact on stable value funds but, according to comments by leading investment consultants and recent research, plan sponsors are not abandoning ship — though they are concerned. There are a lot of questions about SVFs, but so far, plans are holding firm. Though there has been flow this year out of SVFs, according to the Blue Prairie Group, much of that flow can be attributed to the strong and attractive equity markets.

Surveys show that from 2009 to 2012, plans have reduced their SVF allocation from 16.8% to 12%, according to P&I. Hewitt reports a reduction from 19.5% to 14.3% over the same period. SVF managers are trying to mitigate interest rate risk by reducing the duration of the bonds, seeking higher quality investments and allocating more to cash. At the end of 2012, Hewitt EnnisKnupp estimated that the average bond portfolio duration in SVFs was 2.5 years, and NEPC saw increased allocation to cash from the 5%-10% range in 2008 to 10%-20% recently.

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