NEW YORK - Sanford C. Bernstein & Co. is launching a stable value investment management service built around wrapped actively managed bond portfolios.
The Bernstein investment approach is a departure from the laddered buy-and-hold strategy used by many traditional stable value managers and, according to company executives, "significantly increases diversification and safety . . . while generating higher expected returns" than insurance company guaranteed investment contracts.
Bernstein has been one of the principal suppliers of synthetic GICs to the stable value industry and will continue to provide synthetic contracts in addition to stable value fund management, said Jason Psome, managing director-stable value.
Mr. Psome said the Bernstein approach retains the benefits of conventional GIC funds such as predictable returns, benefit responsiveness, book value accounting and liquidity, without a cash buffer. Bernstein will use an umbrella wrap around a diversified portfolio of actively managed high-quality fixed-income securities.
The strategy allows the plan to hold an actively managed bond portfolio at book value, which provides higher returns than conventional GICs and lower cost. Unlike conventional GIC funds, performance can be measured against the Lehman Aggregate Bond Index, said Mr. Psome. Conventional GICs have no generally accepted performance benchmark.
He said the program, which Bernstein is starting to market to plan sponsors, "provides predictable returns, with interest credited at a stated rate that tracks market rates; benefit responsiveness, which allows participants to withdraw or borrow their funds in addition to lower cost; true performance measurement; and higher expected returns."
A few plans already have hired Bernstein to manage their stable value funds. Ingram Entertainment Inc., LaVergne, Tenn., recently retained Bernstein to manage its $5 million stable value fund using the wrapped active bond fund approach.
Ed Triplett, vice president and treasurer at Ingram, said active management of the fund was attractive because of the 70 to 100 basis point historical yield spread over conventional GIC management.
"Active management is far superior from a performance standpoint but it is superior also from the standpoint of the total diversity of the investment universe in the portfolio. For example, in a traditional GIC environment you could not own mortgage-backed securities if conditions called for it," said Mr. Triplett.
Other clients could not be learned.
The Bernstein approach is to convert a plan's stable value fund to a wrapped actively managed fixed-income fund with a constant duration and using multiple wrapper providers. The concept is similar to that recently installed by IBM Corp. following a restructuring of its $3.5 billion internally managed stable value fund. IBM uses a global wrap involving five wrapper providers to share risks on a pro rata basis across the entire $1.4 billion synthetic portfolio managed by eight fixed-income managers (Pensions & Investments, April 28).
"A stable value fund structured as a wrapped bond portfolio is simple for plan sponsors to manage and monitor. The plan sponsor does not have to pay for a 'manager of managers' which eliminates that layer of fees," said Mr. Psome.
"It is also important to know that the plan owns the assets in the underlying portfolio. In addition, with traditional stable value management, plans give up the ability to gauge performance. With this approach, performance is measured against the Lehman Aggregate Bond Index. If we beat the aggregate you will know it; if we don't, you will know that too."
By offering its discretionary management, Bernstein joins a relatively small group that make up the stable value asset management business. That business has gone through a transformation during the past five years in terms of operational independence due primarily to the growth in 401(k) plan assets.
Of all of the major GIC managers that opened their doors in the 1980s, only Fiduciary Capital Management, Woodbury, Conn., remains independent and unattached to a larger financial services firm such as a mutual fund, bank, insurance company or holding company with distribution channels to the 401(k) market.
Peter Bowles, Fiduciary Capital Management president and founder, said it is not out of the question that FCM eventuallycould merge or be sold to a larger firm if the right party is found.
"We have had people courting us since the second year we were in business," said Mr. Bowles. "We are always willing to listen. If at some point there is some organization where our needs and their needs mesh well, it may be an opportunity."
FCM has about $1.5 billion in stable value assets under management.
Consultants say GIC manager searches are rare now and that GIC manager placements usually occur when plan sponsors select a bundled service provider for their 401(k) plans and receive GIC management as an add-on, if needed.
Murray Becker, vice president at J.P. Morgan Investment Management Inc., New York, said the "forced competition" from bundled 401(k) service providers, primarily mutual funds, made it difficult for GIC managers to operate independently, leading most to find partners or affiliations with larger financial services companies.
Certus Financial Corp., San Francisco, was acquired by Mellon Bank, which also owns Dreyfus Corp.; Dwight Asset Management Co., Burlington, Vt., was acquired by United Asset Management; Becker & Rooney merged with J.P. Morgan; PRIMCO Capital Management, Louisville, Ky., was acquired by INVESCO Capital Management; Morley Asset Management, Lake Oswego, Ore., is partially owned by Pacific Mutual Life Insurance Co. And two major separate account stable value management operations are part of major money center banks: State Street Bank & Trust, Boston, and Bankers Trust Co., New York.
The remaining separate account managers are part of mutual fund companies: Putnam Investments, Boston; American Express Institutional Services, Minneapolis; Fidelity Investments, Boston; The Vanguard Group, Malvern, Pa. and T. Rowe Price Stable Asset Management, Glen Allen, Va.
While growth in GIC assets in 401(k) plans has slowed, the stable value option continues to hold most participant-directed assets in most plans. According to a recent study by Buck Consultants, New York, 34% of 401(k) plan assets are invested in stable value funds, compared with 31% in company stock. And synthetic contracts have grown to about $65 billion, almost 24% of the total stable value market.
Stable value managers have started to emphasize investment style differences in order to set themselves apart from each other, although some stable value investment consultants claim the style differences are minimal.
A common approach to GIC portfolio management, as spelled out in a recent T. Rowe Price Stable Asset Management Inc. bulletin, is based on the allocation of a percentage of assets to a laddered segment of investments with maturing contracts providing a certain amount of cash on a regular basis. T. Rowe Price said 10% to 12% of fund assets should be in cash.
Certus Financial has built its reputation as "risk averse" by wrapping fixed-income index managers, said Bruce Vane, senior vice president at Certus.
"We believe it is difficult for active fixed-income managers to add value consistently," said Mr. Vane. He said Certus uses enhanced index managers with a book value wrapper and has nearly $4.6 billion of its $7 billion under management in synthetic contracts. Certus also will use a tiered approach with a cash buffer in its stable value portfolios on a "plan-specific" basis.
Mr. Becker of J.P. Morgan, which serves as stable value manager for several large plans, focuses on contract terms and structuring deals to fit the risk profile of the client's plan.
"We use a combination of GICs and wrapped bonds, but we are not exclusively in either. We believe they complement each other. We bring together the capabilities of J.P. Morgan for fixed income and (the former) Becker & Rooney for the GIC portion," said Mr. Becker. J.P. Morgan has about $10 billion in stable value assets under management.
While firms like Fiduciary Capital follow a more cautious approach, relying heavily on traditional GICs, others like Dwight Asset are more aggressive, using more synthetics and cutting-edge investments while extending the maturity schedule further out on the yield curve.
Some investment consultants doubt the claim that stable value managers have developed investment styles similar to equity and fixed-income managers. They say the limited types of investment vehicles available and the lack of a widely accepted performance measurement standard for stable value portfolios precludes that.
Differences among stable value managers is "tactical" rather than substantive, said a stable value investment consultant who asked to remain anonymous, with the major differences involving allocations to synthetics, traditional GICs and cash.