BANKERS TRUST ADDS NEWBORN TO ITS STABLE: 1ST TO PITCH LOW-RISK 401(K)-LIKE OPTION TO RETAIL BUYERS

Hoping to profit from the stock markets’ continuing slide, fixed-income retirement fund managers are preparing to launch a new class of “stable-value” mutual funds.

This week, Bankers Trust New York Corp. will begin pitching its BT PreservationPlus Income Fund, designed to deliver returns above those of money market funds while maintaining a constant share price. The fund is available only to individual retirement accounts and other small retirement plans.

A parade of other players have registered similar offerings with the Securities and Exchange Commission: Dreyfus Corp., OppenheimerFunds Inc. and Morley Financial Services Inc. — recently acquired by Nationwide Financial Services Inc.

And fixed-income manager Galliard Capital Management Inc., a unit of Minneapolis-based Norwest Corp., expects to file an application to launch a stable-value fund by yearend.

Long a fixture in employer-sponsored retirement plans, stable-value funds should be an easy sell in a difficult market, at least that’s what these firms are betting. The constant share price of these funds is contractually guaranteed by banks and insurance companies.

“The beauty of this is that it offers the returns of an intermediate bond fund with the volatility and principal preservation aspects of a money market fund,” says Wayne Gates, a general director in the stable-value product group at John Hancock Mutual Life Insurance Co. in Boston.

Costs should also be competitive. Bankers Trust is initially waiving 0.51% of its estimated 1.76% in fund expenses to help generate a yield that it expects will be 1 percentage point over the average stable value fund return. And the firm, with $37 billion in stable value investments, clearly has the scale to keep its fees low. The minimum initial investment is $500.

“There is certainly room for some innovation in this area,” says Don Phillips, chief executive officer of mutual fund rating firm Morningstar Inc. in Chicago. “A lot of investors are looking for a safe haven, but they’d like to do a little better than a money market fund.”

But investors should look before they leap. “The mutual fund industry does not have a very good history of behavior when it comes to yield-oriented investments,” says Mr. Phillips. “There was a veritable Trail of Tears in the mid-1980s through the early 1990s of yield-oriented products that were misguided, ranging from option-income funds and government-plus funds to adjustable rate mortgage funds and short-term multimarket funds.”

While stable value funds represented about 70% of defined contribution plan assets in the mid-1980s, last year they stood at just 15%, or $255 billion of the $1.7 trillion market, as more investors shifted into equities, according to a study by John Hancock for the Stable Value Investment Association, a Washington trade group.

“Even though people want to invest for the long term, many still want some portion of their portfolio in conservative investments,” says Eric Kirsch, chief investment officer of Bankers Trust’s structured fixed- income group.

The bank is aiming its marketing efforts at investors with IRA accounts invested in money market funds, savings accounts and certificates of deposit, as well as rollovers from retirement programs. IRAs hold some $62 billion in money market funds. IRA plans at commercial banks and thrifts contain $210 billion in savings accounts and certificates of deposit. And about $50 billion of the $150 billion in retirement plan rollovers last year came out of guaranteed investment contracts or other stable-value portfolios.

When those stable-value assets leave, the only alternative has been money market funds, says Taylor Drake, a vice president and portfolio manager for Morley Capital Accumulation Fund, which expects to open by November.

Between 1983 and 1997, stable-value portfolios returned an average of 3 percentage points annually over money market funds, according to John Hancock. That spread has narrowed sharply with the recent decline in intermediate- and long-term interest rates. Stable-value portfolios now yield about 6% after fees — or only 85 basis points more than the average money market fund.

Bankers Trust also is hoping to market its fund through private-label agreements with other retail fund companies.

Insurance eats up yield

While investors may be tempted to transfer from stable-value funds to short-term money funds at will during periods of rising interest rates, the cost of the insurance wrappers would consume the fund’s yield advantage. As a result, most stable-value funds discourage withdrawals during such periods.

The Bankers Trust fund imposes a 3% charge on non-qualified redemptions when the fund’s annual yield is below the yield on Lehman Brothers’ Intermediate Treasury Bond Index by 1 percentage point. The trigger ceases when the index yield drops 75 basis points under the fund’s effective yield.

But the funds’ insurance policies don’t guard against securities defaults. And of course, the insurance wrapper is only as solid as the company standing behind it. Though stable-value products have largely lived up to their promise in company-sponsored retirement plans, there have been a few blowups: In the early 1990s, three guaranteed investment contract sponsors — Executive Life, Mutual Benefit Life and Confederation Life of Canada — were stung by soured investments that led to delays in investors getting their funds back.

“Just because something is like a money market fund, doesn’t mean it has the same proven stability,” says Mr. Phillips. “If there are mistakes in these funds, I don’t know that fund companies would feel as obligated to compensate investors as they do about their money market funds.”