Stable value managers are developing or beefing up multimanager strategies, hoping to capitalize on recent wholesale defections from INVESCO PLC’s stable value team.
Until now, that team — acquired by Atlanta-based INVESCO through the 1990 acquisition of PRIMCO Capital Management, Louisville, Ky. — has been the only player to make external fixed-income managers a cornerstone of its stable value strategy. INVESCO has won clients in part by leveraging its asset base to provide entry to top-flight managers at attractively low fees, said Phil Suess, a Chicago-based consultant with Mercer Investment Consulting.
As recently as March 31, INVESCO had $47.4 billion in stable value assets, of which about $15 billion was subadvised by fixed-income giants such as Pacific Investment Management Co., Newport Beach, Calif., and Western Asset Management Co., Pasadena, Calif.
Now, however, other stable value heavyweights — such as Minneapolis-based Galliard Capital Management Inc. and Burlington, Vt.-based Dwight Asset Management Co. — are strengthening their alliances to compete for those assets, said Mr. Suess.
INVESCO’s client list was put in play on March 26, when New York-based Deutsche Asset Management announced it was hiring a number of INVES¬CO’s longest-serving stable value veterans.
Competitors said they are seeing an unusual amount of search activity resulting from that move, which has spawned a legal wrestling match between the two firms.
Clients had terminated $1.7 billion in stable value and related fixed-income mandates and notified the firm of an additional $4.4 billion in terminations as of late April, Martin Flanagan, INVESCO’s chief executive officer, said in a late April analysts’ call, an INVESCO spokesman said.
Among those firing INVESCO are Charles Schwab & Co., San Francisco, which chose Dwight on May 16 to replace the firm as lead subadviser for its $3 billion Stable Value Fund, and Russell Investment Group, Tacoma, Wash., which replaced INVESCO with T. Rowe Price Inc., Baltimore.
The situation at INVESCO coincides with heightened interest among stable value providers in offering multimanager programs. Stable value providers have long used pooled funds, but the number looking to incorporate external managers into their programs has increased in recent months, said Greg DeForrest, a consultant with Callan Associates Inc., San Francisco.
But one competitor, who declined to be named, said the flurry of activity reflects only that a big pool of clients wedded to the multimanager approach is now in play, not a sharp pickup in overall client demand for that approach.
Along with Galliard and Dwight, market watchers say Deutsche and Morley Capital Management Inc., Portland, Ore., are also looking to bolster their multimanager capabilities.
In an e-mailed statement, John D. Axtell, a managing director at DeAM and head of the firm’s stable value team, said DeAM has had a multimanager offering for more than 10 years and is “continuing to evaluate new approaches” to implementing such strategies.
Longtime anchors
Stable value strategies — for the most part, broadly diversified bond portfolios wrapped with contracts issued by banks or insurance companies — have long been one of the anchors of defined contribution plans, guaranteeing an investor’s principal while delivering above-money-market returns.
INVESCO has followed a building-block approach, combining 28 commingled funds — some managed internally and others subadvised — according to each client’s needs. Since 2003, the firm has offered an additional five multimanager, fund-of-funds options. INVESCO arranges for the wrap and manages the administrative complexities of the DC option.
With the latest developments likely to reinforce concerns about manager risk, Galliard decided to enhance its own multimanager strategy, adding several new subadvisers, said Karl P. Tourville, a managing partner. He declined to name them.
Galliard’s multimanager offering has garnered just more than $2 billion in assets since its launch in 1998, far less than the $16 billion the firm’s own stable value strategy has attracted, he said.
Laura Dagan, Dwight’s CEO, said her firm, which had been mulling a multimanager offering “for a while,” found a cost-effective way to field a strategy offering complementary sources of return in partnership with Schwab. Dwight manages $35 billion in stable value assets.
Chris Utz, a product manager and 19-year INVESCO veteran, said it won’t be easy for others to match his firm’s strengths: “We have not seen anyone in the industry able to provide the same level of diversification” — portfolios that hold between 2,500 and 3,000 securities — “at the price we’re able to do it.”
While consultants say a reluctance to farm out assets to competitors inhibits the growth multimanager offerings, Mr. Utz said INVESCO executives have always believed that having more uncorrelated investment decisions improves the odds of success. On average, external managers look after just less than 40% of the average client’s stable value assets, all allocated to the intermediate and core segments, he said.
Industry watchers said INVESCO is counting on the flexible nature of its multimanager strategy to help it retain flustered clients. Observers said INVESCO has suggested that plan executives who are worried should move the assets INVESCO is managing to the external managers for now, while leaving INVESCO in charge of the overall stable value portfolio.
Mr. Utz said, “It’s an option (clients) have,” although very few have chosen to do so.
INVESCO’s revenue wouldn’t be hurt. It gets a basis-point fee for the overall portfolio to manage the administrative complexity of the defined contribution stable value option. It gets no additional fee for managing its portion of the underlying assets, said Mr. Utz.
Mr. Utz also said moving the bulk of a client’s assets to the external managers wouldn’t appreciably boost the fees that client has to pay. One consultant, who declined to be named, figured that moving an entire portfolio to the external managers would add seven to eight basis points to fees — which would be netted from the commingled funds they choose.
Narrowed advantage
Some industry veterans see INVESCO’s failure to quickly hire replacements for the stable value managers and relationship managers who look after client needs as a sign the firm isn’t committed to the business. If more clients leave, the firm’s scale advantage will narrow, they warn. “What made this work for INVESCO is size: at $46 billion in assets, they could negotiate good fee deals with the big boys,” said one industry veteran who declined to be named.
Mr. Utz said INVESCO’s commitment remains absolute and argued that the firm’s decision to move both him and 18-year veteran George Baumann, who was head of the firm’s worldwide fixed-income group, to the group as relationship managers made “highly public new hires” unnecessary. “The lion’s share of our (90 stable value) clients are known to us,” and together with two other senior relationship managers, the situation is well in hand, he said.
