Executives at Goldman Sachs Asset Management, New York, want their firm be one of the largest players in defined contribution, and see stable value as the way to enter the industry in a big way.
GSAM's acquisition of Deutsche Bank's stable value business for an undisclosed sum, announced Sept. 25, is the second and most recent move in growing its footprint in stable value, following its purchase of Dwight Asset Management, Burlington, Vt., in early 2012.
Craig Russell, managing director and head of GSAM's Americas institutional business, said in an interview he is confident that the best way into the DC business is through stable value.
“The DC space is a big focus for us,” said Mr. Russell, who took over GSAM's DC business in March 2012. “So when the opportunity with Deutsche Bank arose, it has the potential to move us up in the DCIO (defined contribution investment-only) space and stable value space as one of the leaders in the business.”
“I think it's a vote of confidence when a firm like Goldman Sachs believes this is a growth industry,” said Aruna Hobbs, managing director and head of stable value at New York Life Investments, Westwood, Mass.
GSAM's DC footprint is growing at a rapid rate, thanks to these acquisitions.
Ahead of the Dwight deal, GSAM had $34.5 billion in defined contribution assets as of Dec. 31, 2011, according to Pensions & Investments. None was in stable value.
With the acquisition of Dwight, its DC assets more than doubled to $54.5 billion the following year.
The Deutsche deal, slated to close in the first quarter of 2014, should bring GSAM's defined contribution assets to about $76.6 billion, including $55.6 billion in stable value.
When asked about the possibility of buying another stable value business in the near future, Mr. Russell said: “We're just focused on the transaction at hand.”
In terms of providing wrap insurance, one person with knowledge of GSAM's business who requested anonymity explained that the firm partners with a number of wrap providers.
Some industry participants believe stable value will become more popular.
“It's a great diversifier,” said Gina Mitchell, president of the Stable Value Investment Association, a Washington-based organization. “A lot of plan participants are using it to blunt volatility. It has the least correlation to equities.... We're seeing a bit of a renaissance in interest from plan sponsors.”
Her organization's statistics show stable value managers had $701.3 billion under management at the end of 2012, representing 14% of DC assets and an increase from $645 billion a year earlier.
P&I's annual survey of the largest U.S. retirement plans, however, shows stable value is a shrinking percentage of defined contribution plans' asset allocation. Stable value accounted for 12% of DC plan assets in the year ended Sept. 20, 2012, vs. 16.8% three years earlier.
Ms. Hobbs, who oversees $23 billion in stable value assets for NYLI, said stable value is “a steady, predictable, no surprises kind of asset class.”
Geoffrey Bobroff, president and founder of the East Greenwich, R.I.-based consulting firm Bobroff Consulting Inc., noted that if interest rates go back to pre-crisis levels, there could be more demand for stable value. If so, now might be a good time to enter the business in a significant way. He added that GSAM could indeed be a big player in the DC industry if it plays its cards right and is smart about marketing its stable value strategies.
“There are certainly firms that are more significant players in the space, but there's no reason that Goldman can't be successful. Goldman has the leverage that others might not have,” Mr. Bobroff said.
But not everyone agrees that stable value is the best way into the defined contribution market. David Bauer, a founding partner of consulting firm Casey, Quirk & Associates LLC, Darien, Conn., doesn't think there's “any magic to stable value as an entry point to defined contribution.”
Instead, Mr. Bauer believes target-date funds might be a better point of entry. “(Target date) is the vehicle for change,” he said. “To make a dent in the industry is to make something with target-date series.”
GSAM had been in the target-date business for about five years without gaining much traction when officials decided to close and liquidate the funds in July 2012. The firm had about $62 million in its target-date series at year-end 2011, according to Morningstar Inc., Chicago. Morningstar data showed the six-fund series had outflows about almost $32 million 20111, following outflows of about $9 million a year earlier.
GSAM officials are bullish on the stable value business, viewing it as a strong asset class. “The landscape is beginning to shift as to where assets are beginning to accumulate for retirement,” Mr. Russell added. “We're excited about our presence in the DC space.” n
This article originally appeared in the October 14, 2013 print issue as, "Goldman sees stable value as a doorway to DC business".