Traditional insurance company contracts and synthetic stable value contracts are not the only game in town any more in the steadfast world of stable value investing.
Seattle-based Residential Capital Management, Bellevue, Wash., is preparing to offer a synthetic contract using a portfolio of subprime or non-conforming residential mortgages, "one of the very few new things in this industry," according to Larry Mylnechuk, co-founder and president of Residential. The offering provides the benefits of conventional stable value investments, like benefit responsiveness, book-value accounting and predictable yields, which are higher than money market funds.
The concept attracted the attention of State Street Global Advisors, Boston, which this month added Residential to its State Street Global Alliance, a jointly owned subsidiary of SSgA and the e150 billion ($138 billion) Dutch pension fund ABP, Heerlen, Netherlands. The alliance was created to seed niche asset management firms that complement SSgA's existing investment strategies. Managers in the alliance also are expected to receive investment mandates from ABP.
Their firm's offering is not designed to replace existing stable value contracts but to supplement them, said Mr. Mylnechuk, along with Residential's president, Fredrick Barkman Jr. The investment objective is to provide a higher yield, between two and four percentage points, than traditional stable value contracts. Currently, he said, the offering generates yields of about 9.5%, a "nice bump" over traditional stable value investments.
New access
"To our knowledge, it (wrapping an actively managed portfolio of non-conforming residential mortgages) has never been done before, said Jay Cromarty, managing partner of SSgA. "Historically, investors could only get access to this market through unmanaged accounts."
He said the first assets invested in the Residential contracts are expected during the second quarter of this year.
Another relatively new twist on stable value investing is in the mutual funds area. Traditionally stable value investments have been separate accounts or commingled funds for the defined contribution market.
Deutsche Asset Management, New York, launched the first stable value mutual fund, PreservationPlus, in 1997. Since then, it has attracted nearly $270 million and now has a three-year track record that has earned the fund a five-star rating from Morningstar Inc., Chicago.
"People like bond investments because they like the income, but never think about if interest rates go up (bond prices go down)," said Eric Kirsch, portfolio manager for PreservationPlus and head of Deutsche's stable value fixed-income group. "With a stable value fund, they can have their cake and eat it, too."
