Firms protect stable value yields

Wells Fargo latest to set 'soft close' over interest-rate concerns

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Testing: David Ferry of Galliard Capital believes “these are unprecedented times.'

The Wells Fargo Stable Return Fund will limit investments effective Jan. 2, the latest restricting inflows over concerns that new money in a continuing low interest-rate environment will lower yields for existing investors.

Only plans that have a record-keeping and trustee relationship with Wells Fargo can enter the $29.9 billion fund as new investors next year, said David Ferry, senior director at Galliard Capital Management Inc., Minneapolis, the fund's adviser.

“If the fund had accepted an unrestricted amount of new money in this low-interest-rate environment, we had concerns that there could be a dilutive effect on the crediting rate,” said Mr. Ferry. He was referring to the interest rate on the book value of the stable value fund, which is described as the effective annual yield.

“This is purely driven by low rates and expectations of low rates in the future,” he said. “These are unprecedented times.”

Restricting inflows like Wells Fargo and others have done — known as a soft close — “makes sense (for some funds) so they don't have to do a hard close later,” said Christopher Lyon, a partner at Norwalk, Conn.-based Rocaton Investment Advisors LLC. “Letting in a lot of new money (when interest rates are low) is dilutive in terms of future returns.”

Low interest rates and concerns about wrap capacity — the availability of affordable insurance products that guarantee the book value of the underlying bond investments — were the reasons for several fund liquidations this year.

Among the liquidations were: Charles Schwab, San Francisco, a $7.6 billion stable value fund; SEI Investments (SEIC) Co., Oaks, Pa., a $2 billion fund; and Union Bank, San Francisco, whose spokeswoman refused to give the size.

Noted Sue Walton, Chicago-based senior consultant with Towers Watson Investment Services Inc., a subsidiary of Towers Watson & Co.: “We thought there would be an increase in wrap capacity due to new entrants in the market, but wrap capacity is constrained.”

In the past, several money managers have cited wrap capacity as reason to initiate a soft close.

Invesco (IVZ) Ltd., Atlanta, for example, closed its $6.31 billion fund in April 2011. “The sole reason we entered limited offering status was due to the industrywide constraints in the wrap contracts,” Bill Hensel, director of media relations, said in an e-mailed response to questions.

Invesco is “cautiously optimistic” that the fund could reopen next year “as the wrap market gains additional capacity,” Mr. Hensel added.

Smaller investments

More recently, The Bank of New York Mellon (BK) Corp. (BK), initiated a soft close in January for its $1.2 billion fund, but is accepting money from new clients as long as they invest less than $1 million in the fund.

“With a number of pooled funds winding down, large potential inflows could have caused a significant decline in fund yield, as cash could not be immediately reinvested in longer-duration book-value wrap products,” spokeswoman Patrice M. Kozlowski said in an e-mailed response to questions.

Putnam Investments, Boston, enacted a soft close in November 2011 for its $6 billion fund; the only new investors could be those administered by Putnam. “We felt we had a fiduciary duty to protect existing clients,” said Peter Whitman, head of the defined contribution investment-only business at Putnam.

Putnam monitored interest rates monthly during 2011 before acting, and it will continue to do so to determine if other steps should be taken, he said.

Vanguard Group Inc., Malvern, Pa., has had a soft-close policy for its $19 billion stable value fund since late 2008 or early 2009, spokeswoman Linda Wolohan said.

“In our case, a soft close means there is some availability for new plans,” she wrote in an e-mail. “Requests to add stable value are evaluated on a case-by-case basis, regardless of what kind of relationship (plan sponsors) have with us.”

T. Rowe Price Inc., Baltimore, has a soft-close policy for its $12.6 billion stable value fund “only on the investment-only piece of business,” spokesman Brian Lewbart said in an e-mailed response to questions,'

It was instituted in mid-2009 “to preserve capacity for our existing full-service clients, as well as any new full-service clients,” he said.

This article originally appeared in the December 24, 2012 print issue as, "Firms protect stable value yields".