Strategy Spotlight

Why the MV‑to‑CV Ratio Doesn’t Tell the Whole Story

How do you measure the health of a stable value fund? In the wake of the 2008 global financial crisis, the MV-to-CV ratio (market value to contract value ratio) became a popular data point to estimate the underlying portfolio performance and potential long-term return prospects – but we believe that one metric doesn’t tell the whole story and relying on it solely can expose participants to unnecessary risk.

What does the MV-to-CV ratio actually measure?

The MV-to-CV ratio is calculated by dividing the fair market value of all the stable value fund assets by the total contract value of all the stable value fund assets as provided by the wrap contracts. If the ratio is above 100%, the stable value fund has a surplus of market value assets backing the stable value contracts versus what has been promised to participants, as represented by the contract value. If the ratio is below 100%, this means the stable value fund’s market value has a shortfall compared to the contract value of the stable value wrap contracts supporting the participants’ investments.

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Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

There is no guarantee that a stable value fund or strategy will achieve its investment objective. Like other actively managed investments, stable value investments are subject to investment management risk. Stable value funds are not FDIC-insured, may lose value and are not guaranteed by a bank, insurance company or other financial institution. Although stable value investments seek to reduce the risk of principal loss, investing in a stable value fund involves risk including loss of principal, and market risk related to the underlying securities in the fund’s portfolio. Returns on stable value investments can also vary from benchmark indices and the crediting rate for a stable value fund will be affected by, among other factors, the prevailing general level of interest rates, the performance of the underlying fixed income investments and cash flows into and out of the fund.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

Stable value investment contracts are issued by insurance companies, banks and other financial institutions, are intended to help reduce principal volatility of, while providing steady income from, any associated fund fixed income investments, and are intended to be valued at contract value (typically, deposited principal plus accrued interest less redemptions). Investment contracts vary and may include insurance company separate account contracts, synthetic contracts (also known as wrap contracts) or insurance company general account contracts.

PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features. It is not possible to invest directly in an unmanaged index.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. The information contained herein does not take into account the investment objectives, financial situation, or needs of any particular investor.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.

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