The issues of distribution and efficiency have forced some stable-value managers to reconsider their affiliations and in some cases make new ones.
For the stable asset advisory and consulting unit of Laughlin Group of Cos., Beaverton, Ore., the time had come to tap into the "significant advantages in size," said William Gardner, managing director of Laughlin's stable-asset advisory unit. The firm was acquired last month by Burlington, Vt.-based Dwight Asset Management, a manager of stable-value funds.
The merger brought the management of $15 billion in assets under one roof and will allow Mr. Gardner's firm to compete with larger firms, many of which have added stable-value management only as a side business.
"Distribution is part of the issue, as are the economies of scale required now for stable-value managers to be a success," said David Richardson, managing director of Dwight.
Dwight is expected to bring expertise in investment technology and additional resources to Laughlin, while Laughlin should add to the product lineup with its experience with bank-sponsored commingled funds, as well as its mainly West Coast clients, said John Dwight, Dwight president, in a statement.
Laughlin had long felt the market had gotten sophisticated, Mr. Richardson said. Without the sale, Laughlin would have needed the resources to conduct research or would have had to hire subadvisory firms.
After the acquisition is complete, about one-third of the stable-value portfolios will be outsourced, while the rest will be run internally, including traditional guaranteed investment contracts.
The new consolidated firm should be a reality within the month, but the terms of the transaction were not disclosed.
While the firms already had affiliations -- Dwight with United Asset Management and Laughlin with Allstate Life Insurance Co. -- both needed change to compete in the market place, according those involved.
Others who are active in the stable-value industry, such as John J. Palmer, senior vice president at Cincinnati-based Ohio National Financial Services, have surmised that Allstate was basically interested in Laughlin's individual annuity business and chose to sell off the stable asset-related side.
And Mr. Palmer has his own merger story to tell.
The same week Dwight and Laughlin announced their merger, Ohio National Financial announced it was acquiring Woodbury, Conn.-based Fiduciary Capital Management.
Ohio National really liked FCM's performance and believes both firms share opinions on the GIC industry, Mr. Palmer said.
FCM will be allowed to continue to operate from its headquarters as an independently operating affiliate, officials at both companies said.
The merger will help FCM gain resources for better distribution, said Peter Bowles, FCM president.
The acquisition was no surprise to those in the industry or to Mr. Bowles, who had been contacted at least eight times by interested buyers by mid-year. Last year, he was solicited five times, he said, adding that all callers had "varying degrees of attractiveness."
"I happen to think we are on the cusp of a significant growth phase in stable value,"he said.
Mr. Bowles believes that the next five to eight years are going to favor stable-value investors and that interest will be piqued in aging baby boomers reading their asset allocations for retirement. Older people -- particularly individuals with higher balances -- may switch to stable value, thus boosting stable-value assets.
FCM reached an agreement with Ohio National to sell 51% of its shares to the mutual insurance company. The deal closed last week. The deal was expected to close last week. Terms were not disclosed. The firms combined will have about $8.5 billion under management.
Others in the stable-value industry point to other recent acquisitions such as INVESCO's purchase of PRIMCO as the success stories that lead other firms to follow in their footsteps.
At Laughlin, Mr. Gardner is espousing a "small-shop attitude in a larger company" relationship.
The question remains: Can the little fish retain some freedom in the stomach of the bigger fish?
"Will we lose the boutique aspect? That's a good question," Laughlin's Mr. Gardner said.
One stable-value manager, who asked that his name not be used, doesn't think it's possible for firms to remain autonomous, especially in the case of FCM.
"Peter Bowles is an independent thinker in the industry . . . but it all depends on how hard he was pursued," he said, adding that it's impossible to keep independent thinking within a large institutional organization.
