Looking to increase cash flows and take advantage of safety-seeking aging baby boomers, stable value managers are taking a gamble on the mutual fund business.
Six stable value firms either have started a mutual fund, gained SEC approval to do so, or are in registration. Other firms are planning to throw their hats into the ring in the coming months.
"Everybody's looking for the next holy grail," said George Baumann, president of PIMCO, which is considering a mutual fund launch.
Some managers are predicting the pattern for stable value mutual funds will follow that of collective trusts created 10 years ago to cater to the 401(k) marketplace. Collective stable value trusts now have in excess of $10 billion in assets, according to Rob McCormish, president and chief executive of Certus Asset Advisors, San Francisco.
Mr. McCormish's firm has SEC approval to launch a Certus fund -- the Dreyfus Retirement Income Fund -- that will be introduced to markets that might have eluded stable value funds in the past, such as the 403(b) and 457 markets. Traditionally these plans use insurance companies, which offer only traditional guaranteed investment contracts, as opposed to synthetic GICs, which are more liquid, he said.
Eventually, Mr. McCormish expects the firm will gear up and sell to the IRA rollover market.
Other industry leaders expect the individual retirement account market will help stable value gain popularity. Stock market volatility and an aging population looking for less risky investments might not hurt either.
Gina Mitchell, president of the Stable Value Investment Association, Washington, has seen increased interest in the asset class, especially in recent months, with stable value being mentioned in the general press.
"What I was really amazed at was how receptive folks were to stable value . . . A lot of it was they had a really great experience with them (stable value options) in their 401(k) plans," she said.
Surge of strategies
Burlington, Vt.-based Dwight Asset Management is banking on baby boomers' interest with its Dwight Capital Preservation Fund. The fund is in registration with the SEC and, according to the SEC filing, will only be open to IRA holders.
Morley Capital Management, Lake Oswego, Ore., has launched the Morley Capital Accumulation Fund, with both institutional and retail shares. Taylor Drake, vice president and portfolio manager is co-managing the fund with Thomas Mitchell. He said the fund is seeded with $5 million from Morley. Nationwide will be distributing the fund through its network of broker dealers.
New York-based Oppenheimer Capital, not a firm that is known for stable value, has a fund in registration. Officials at the company would not comment further.
Bankers Trust, New York, already has two mutual funds up and going: BT Preservation Fund for institutional investors and BT PreservationPlus Income Fund for retail investors. The funds have $290 million and $5 million in assets, respectively.
Eric Kirsch, a managing director overseeing stable value at Bankers Trust, said the bank decided to have separate funds for distinct groups of investors to avoid confusion between share classes and to be able to cater to each group's bond rating investment criteria.
Europe and Japan might be next in line to see Bankers Trust stable value mutual funds, with the defined contribution market just opening up overseas. Both regions are "craving" stable value products, Mr. Kirsch said.
Domestic start-ups
Some firms thinking about starting up funds domestically are PRIMCO Capital Management, Louisville, Ky.; Fiduciary Capital Management, Woodbury, Conn.; and Galliard Capital Management, Minneapolis; American Express Asset Management, Minneapolis and J.P. Morgan Investment, New York.
The question for PIMCO's Mr. Baumann is whether the introduction of stable value mutual funds is of "real value" to participants, compared with collective trusts, which are less expensive for managers and plan sponsors alike.
"I'm not sure of the ease of extrapolation that mutual funds will be the end-all, be-all of stable value," Mr. Baumann said.
While most managers agree the mutual fund vehicle might not be cost effective for plan sponsors, there still is a market for the funds for bundled plans that prefer to use all mutual funds, according to Certus' Mr. McCormish.
Bill Schnieder, managing director of DiMeo Schneider Associates, a consultant to defined contribution plans, said the main motivation to pay more for a stable value mutual fund would be to lessen participant confusion when trying to track their stable value option's performance in the newspaper.
He also said a plan sponsor changing a vendor or record keeper might be apt to add a stable value mutual fund that is offered by a new vendor.
FCM's Peter Bowles also is not overly optimistic on stable value mutual funds, although he predicts his firm will have a fund in registration in the next 18 months. His goal would be to target the retail market, but institutional investors probably would be allowed to purchase shares too.
Performance is key
Mr. Bowles agrees with Mr. Baumann and does not see the advent of the mutual fund as the demise of the collective trust fund.
Performance above that of money market funds will be key, he added. Right now, that goal is more difficult because of the low interest rate environment, and he doesn't see now as the time to be introducing a fund.
Galliard is hoping to have a fund out in the next few months, according to Karl Tourville, managing partner. The fund will be targeted to IRA investors, traditional defined contribution plans and 403(b) plans.
Mr. Tourville is working with an outside mutual fund company, which he would not name.
The key to mutual funds resurrecting the stable value industry will be distribution, said PRIMCO's Mr. Baumann. Many firms launching these mutual funds have parent companies with distribution channels in place, but for most those alliances are not done deals.
PRIMCO may be a prime example. The firm is affiliated with INVESCO, which owns A I M Advisors in Houston. It is not known whether the firm will be able use A I M's distribution channels.
