Just what is a stable value fund? The investment management firms that offer these funds are about to let the rest of the fund world know exactly what they do. Today, Morley Financial Services, a Portland, Oregon-based unit of Nationwide Financial Services, and one of the leading stable value asset managers announced the launch of its new fund, the Morley Capital Accumulation Fund. Morley was preceded into the market by Bankers Trust which offers two funds, one for the institutional market and one for the IRA market. Other with investment managers with funds in registration or in the works are Dreyfus (through Certus Advisors), Oppenheimer Funds, and Galliard Capital Management.

Although it was announced today, Morley's fund was opened on Feb. 1 with $5 million in seed capital, reports Taylor Drake, vice president and portfolio manager at Morley Capital Management. The fund is advised by Union Bond & Trust Company, a Morley subsidiary, and is underwritten and distributed by Nationwide Advisory Services, Inc.

The fund offers three share classes -- two for the qualified plan market and one for the retail fund market. The IRA class has an expense ratio is 95 basis points and a minimum investment of $2,000. The Institutional Service class also has a 95 basis point expense ratio. Meanwhile, the Institutional class for larger plans has a 55 basis point expense ratio.

The fund will be used in several existing Nationwide products. But, it will also be offered to non-Nationwide customers, says Drake. "We are also looking at Morley clients." he explained.

"We are going to take a broad brush to target IRA holders, including broker-dealers, Morley channels and direct channels," Drake told the MutualFundWire.com.

Although the fund is not available in any of the no transaction fee supermarkets, he expects that they will be offered through this channel down the road.

Long a staple in 401(k) and defined contribution plans (where they are commonly known as GIC funds) stable value funds attempt to deliver intermediate level yields to investors with the low volatility of money market funds. They do this by offering "book-value wraps" -- liquidity guarantees from third-party financial institutions -- which allow them to carry a stable net asset value.

Morley will use three institutions to wrap the fund, each of which will take exposure to a percentage of the portfolio in a global wrap format. Drake declined to name the three wrappers. He added though, that the fund will target a AA or better credit quality in its fixed income investment portfolio.

Wrappers in stable value funds have used the qualified plan structure to protect themselves. Simply put, they have relied on plan rules such as equity washes and banning money market funds to keep investors from timing the market by switching between stable value funds and money market funds as interest rates wax and wane. (In an equity wash, investors cannot move assets directly between a stable value fund and a competing money market or fixed income fund. Typically they must wait 90 days in an equity fund first).

Obviously, these tactics do not work in the IRA market. So Morley has developed an innovative redemption fee structure to solve the disintermediation problem. Unlike other funds, the redemption fee is not tied to how long investors are in the fund. Instead it is tied to interest rates.

Normally, the fund will carry no redemption fee. The exception is when the fund's gross yield falls 2% or more below the 90 day Dealer Commercial Paper index. The index can be found daily in the Wall Street Journal which means it can be easily tracked by investors. Back-testing by Morley found that the redemption fee would have been in effect only during one ninety day period in early 1989.

Currently the gross yield on the fund is 5.83% and the Commercial Paper Index is 4.85%, so the redemption fee is not in effect.

Drake reports that it is too early to tell how individual investors will react to this type of fund. But, if 401(k) investors are indication the future for a fund which combines intermediate yields with money market volatility could be a popular choice for certain segments of the IRA market. 

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