At the beginning of a stable value strategy, the market value of its assets and the book value are the same. From that point on, the two will diverge for each strategy that includes separate account contracts or synthetic envelope contracts, as the book value changes at the net borrowing rate and the market value changes with the return on the fixed income portfolio. The depreciation component ensures that the interest rate on the credit is higher if the market value is greater than the book value and lower if the market value is less than the book value. As a result, the ratio of the fund`s market value to its book value (M/B ratio) approaches 100% over time, unless there are external influences such as cash flows or hangers in the market value of the underlying fixed income securities. The gain or loss represented by the fund`s M/B ratio is generally amortized over the life of the fund. For example, if a fund had an M/B ratio of 102.5% or if its securities were worth 102.5% of the book value at which participants were trading, it would receive a higher credit rate of 1.0% if its term was also 2.5 years, everything else was the same. This is the gain of 2.5%, which is reflected in the M/B ratio divided by the 2.5-year term. An M/B ratio of less than 100% would hurt the fund`s performance. It is important to note that a low M/B ratio is not in itself an indicator of poor fund performance.
If interest rates rise, we expect M/B ratios in stable value strategies to decline. The way depreciation is carried out suggests that in the absence of a sustained movement of interest rates in one direction, M/B ratios should be above 100% in half the time and below 100% in the other half of the time. Since contributions to funds and withdrawals from the fund are typically made at book value, net cash deposits in a fund shift the M/B ratio to 100% and net outflows from a fund cause the fund`s M/B ratio to deviate further by 100%. Steady-value funds are a common option in some pension plans, such as 401(k) Company plans, especially for savers approaching retirement. Bankruptcy, credit quality or other challenges to the financial solvency of one of these participants can affect the stability of your investment. At T. Rowe Price, we have approved 14 insurance companies and high-quality banking packaging providers for use on our stable value platform. Most importantly, we have strengthened our wrap supplier selection and monitoring process to reflect the factors we believe are most important for stable value investors. Stable value funds can take many forms. The differences between them are the source and nature of the underlying assets.
Steady-value fund expense ratios include management, operating, wrap and sub-advisory costs, as well as payments to third parties such as recorders to offset plan management costs. The management fee is paid to the asset management company and the operating costs include items such as audit fees. These tend to be stable over time. Envelope and sub-advisory costs were not reported in stable value-added ratios until the entry into force of the new ERISA amendments in 2012 (8). Wrapping and sub-advisory issues change regularly as new investment contracts are added or allocations between them change. Some CIT managers update their envelope and sub-advisory costs on a quarterly basis. Others do so less frequently, for example after the annual audit of the fund. A few do not include wrapping and sub-consulting costs at all in their expense ratios.
We report expense ratios, including these costs, in accordance with the general consensus. The costs of sales, customer service, or plan management are usually customizable by accessing different classes of actions in a particular strategy. These expenses constitute remuneration for a third party and should be considered separately for competitiveness, depending on the services the plan receives from that party and the fairness of how the costs are allocated among the options available in the plan. FOR INFORMATIONAL PURPOSES ONLY. Investment and fiduciary advisory services are provided through Newport Group Consulting, LLC, a registered investment advisor and affiliate of Newport Group, Inc. The securities are offered through Newport Group Securities, Inc., a member of FINRA and a subsidiary of Newport Group, Inc. The California securities are offered under d/b/a Newport Securities Insurance Services. Other insurance products may be offered by Newport Group, Inc. All information presented in connection with this announcement is of a general nature and is not intended to provide personal investment advice. This material does not take into account the specific investment objectives, financial situation and special needs of an investor.