Stable Value Fund (SVF)

Manager's Quarterly Commentary Check the current crediting rate

• Fund Performance
• Fund Characteristics
• Risk Disclosures

Type of Fund: Low risk bond fund.

Objective: To preserve capital and earn current income.

Who Should Invest: Investors with low risk tolerance who are unwilling to risk the loss of any capital contributions or accumulated interest.

Investments: The investment portfolio consists of a broad selection of short- and medium-term fixed-income securities including U.S. government and agency bonds, corporate bonds, mortgages and asset-backed securities. Additionally, the fund may hold insurance company issued Guaranteed Investment Contracts (GICs) or similar instruments as well as cash equivalents.

Management: San Francisco-based Standish Mellon Asset Management Company LLC (a division of Mellon Bank) manages $9 billion stable value assets and is the lead manager of the fund. Additionally, the fund engages the services of highly regarded fixed-income managers to manage a portion of the fund's assets.

Strategy: The primary objective of the Stable Value Fund is preservation of capital while earning current income higher than that of money market funds. Accordingly, the manager will invest in a broad range of high quality, low-risk fixed-income instruments. This includes U.S. government and agency bonds, corporate bonds, mortgages, asset-backed securities and other similar types of investments.

The manager contracts with highly rated insurance companies which provides the principal protection feature that assures participants can transfer or withdraw the value of all contributions and accumulated interest. Our list of current insurance companies used by the Stable Value Fund is published on this Web site.

The General Board will price this fund consistent with standard industry pricing practices for money market funds. It will maintain a constant unit price of $1.00 and credit participants with interest at month end. Each month, the General Board posts on its Web site the interest rate earned by the fund during the previous month.

Performance Benchmark: Ryan Labs 3-Year GIC Index.

Performance Objective: The fundamental investment objectives of the fund are to preserve both invested principal and earned interest, to earn a stable fixed-income yield and to provide liquidity for participant-directed disbursements.

For more detailed information regarding the Stable Value Fund, please see the Investment Funds Description.

Fund Performance:

Fund Market Value (as of 9/30/08): $1,881,371,098

Annual Performance at Year End

Compounded Annual Performance, Net of Fees (periods ending 9/30/08):

¹The benchmark performance represents the underlying investment results for three-year guaranteed investment contracts (GICs) originated on or after November 18, 2002, and included in the Ryan Labs 3-Year GIC Index. The General Board believes that this is a more fair comparison to the results achieved by the fund since the unadjusted return of the Ryan Labs 3-year GIC Index includes GICs originated prior to November 18, 2002. The Stable Value Fund originated on November 18, 2002, and therefore was unable to purchase GICs or any other security prior to that date.

Fund Characteristics:

Fund Holdings (As of 9/30/08): Download/view fund holdings in PDF format.

The fund holdings include the actual investments made by the fund and also provide a listing of insurance companies that are providing the fund with principal protection.

Expense Ratio: The General Board will charge participants in the Stable Value Fund annual expenses equal to approximately 0.41% of total fund assets. This cost includes investment management fees, operating expenses and bank custodial fees.

Stable Value risk disclosures

Fund objective:

The objective of the fund is preservation of principal. Accordingly, the General Board and its investment manager have directed the investment of fund assets in a manner that minimizes, but does not completely eliminate, the risk of loss of a participant's principal.

Fund investments:

The following investments held by the fund seek to provide participants with a stable rate of return, safety of principal and accrued interest while accommodating participant withdrawal needs:

1. Traditional Guaranteed Investment Contracts (GICs)—contracts issued by a life insurance company or bank providing a guaranteed rate of interest for a specified period of time. These contracts are backed by the full faith and credit of the issuing company.
   Risk: If the issuing company goes bankrupt and is not able to make interest payments or return the principal, that portion of the account becomes a general creditor of the insurance company. The fund risks possible loss of principal or a lower crediting rate if the issuer is unable to pay on or before maturity.
2. Actively managed bond portfolios that include a guarantee by a highly rated insurance company. The bond portfolios are diversified portfolios of high quality bonds that are held in trust for plan participants. There are two reasons why the value of bond investments may increase or decrease. The first reason is due to the level of interest rate change. The second is due to the improvement or impairment of the credit rating of the bond issuer. In order to protect participants from adverse changes in value caused by interest rate moves, the Stable Value Fund manager has secured an insurance company guarantee. (The insurance company insulates the fund from interest rate risk and guarantees participant redemptions at full credited value.) This guarantee is called a "wrap contract".
   Risk: If a bond in the portfolio loses value because of a negative credit event such as a default, the Stable Value Fund risks a loss of principal or a lower crediting rate.

Most stable value managers have attempted to minimize credit risk by investing less in traditional GICs (direct obligations of the insurance company). They can now diversify credit risk by combining the actively managed bond portfolios with insurance company wrap agreements.

If the insurance company goes bankrupt, the plan still owns the bonds in the portfolio. Additionally, the investment manager can reduce the fund's risk by building a diversified portfolio that carries high credit ratings.

Two other types of risk exist in a Stable Value Fund portfolio:

1. Interest rate risk—the Stable Value Fund's return is a blend of the interest rates paid by all of the investments/contracts held by the fund. As the older contracts in the fund mature, they are replaced with new investments with current interest rates. These new investments may have interest rates that are lower than the maturing ones.
2. Liquidity risk—this risk is reflected by the market price that is available to liquidate contracts/securities in order to meet participant withdrawal demands. If redemption requests are high, the fund may incur a cost to liquidate sufficient securities to meet redemption requests. Investing in a minimum of cash and cash equivalent securities reduces the need to sell contracts/securities.

Lending of Portfolio Securities: The fund seeks to earn additional income by making loans of its portfolio securities to brokers, dealers and other financial institutions. The loans will be secured at all times by cash and liquid high grade debt obligations. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower fail financially. Additionally, losses could result from the reinvestment of the cash collateral received on loaned securities.