Two financial services firms have introduced stable value investment vehicles with some new twists designed to appeal to the growing interest in guaranteed investment contract alternatives by defined contribution plans.
A synthetic GIC developed by Aldrich, Eastman & Waltch, a Boston real estate advisory firm, uses commercial mortgage-backed securities as its underlying assets. The program has drawn some criticism for its apparent lack of diversification.
A separate account GIC offering by ITT Hartford Life Insurance Cos., Simsbury, Conn., allows smaller plans to select and model a portfolio with the risk and return features they want to meet specific needs.
AEW officials claim an "industry first" with the new synthetic backed by commercial mortgages. AEW said one pension client, which it wouldn't identify, has invested $30 million in the synthetic GIC.
"In creating this investment for our client, we sought to enhance the overall yield of the plan's fixed-income portfolio and to diversify the asset base available through GICs by accessing the huge commercial real estate market," said Daniel M. Cashdan, vice president at AEW.
But the diversification question drew mild criticism from some observers who point out the move to synthetics was fueled by years of concentration on insurance company GICs. Most synthetics on the market now are backed by a diversified portfolio of fixed-income securities.
"Synthetics came about to diversify stable value assets," said Jason Psome, director-synthetic GICs at Sanford C. Bernstein & Co., New York. It represented a move away from investing solely in the financial (insurance) sector to money managers that find value in all sectors of the bond market. To utilize 100% commercial mortgages is simply re-exposing yourself to a single sector market."
Mr. Cashdan said the synthetic GIC was created to enhance the overall yield of a plan's fixed-income portfolio "and to diversify the asset base available through GICs by accessing the huge commercial real estate market."
"This contract would offer further diversification in an existing GIC portfolio and is a specific way to invest in commercial mortgage-backed securities. We sure wouldn't expect 100% of the plan's assets to be invested in the AEW contract," Mr. Cashdan said.
The ITT Hartford "Core and Conversion" account allows investors to design an investment approach incorporating the funds' risk and return characteristics.
Plans may invest their assets in a pooled core account, managed to track the three-month London interbank offered rate plus 50 basis points. Or, plans may select a "conversion" account, designed to match the return of a benchmark of their choice. A "performance guarantee" can be selected in the conversion account.