Stable value managers are hoping for the best while preparing for the worst.
They're keeping more cash on hand for potential future redemptions, having seen managers of historically safe funds like money markets hit by heavy redemptions over the last several months.
And while the high percentage in structured credit could appear risky, managers have diversified their holdings within the sector to maintain liquidity and provide adequate returns and protection to investors.
The flight to quality of defined contribution plan participants into stable value began in September, spurred by plummeting global equity markets, fears of global recession and a rising credit crunch.
The rush hasn't stopped. In November, participants in 401(k) plans moved $342 million into GIC/stable value funds, bringing total 401(k) plan assets in stable value to a record 33.4%, from 20.5% a year earlier, according to Hewitt Associates, Lincolnshire, Ill. In October, Hewitt reported GIC/stable value received $1 billion in inflows.
Even money market investments, a traditional safe haven, scared many investors as funds such as New York-based Reserve Management Co.' s Primary and Yield Plus funds each “broke the buck” — declined in net asset value to less than $1 — in September, due to large redemptions and a lack of diversification.
To prevent stable value from suffering a similar fate, managers are bulking up on cash.
Dwight Asset Management, Burlington, Vt., has about twice as much cash on hand now as it did a year ago, Laura Dagan, chairman and chief executive officer, said in an e-mail response to questions. Dwight manages $50 billion in stable value.
Ms. Dagan wrote that all of Dwight Asset's stable value portfolios have “sizable” cash positions in the event that investor sentiment does turn around, and there are substantial additional sources of liquidity if the need arises. She declined to disclose how much the portfolios have in cash.
Invesco, Louisville, Ky., also has a higher level of cash holdings in its $30 billion stable value portfolio than last year, said Jennifer V. Gilmore, senior portfolio manager and head of stable value. She also would not say how much the firm had in cash holdings.
“As portfolios experienced an increased level of contributions, we have been slower to invest these additional dollars, which has created a larger cash position,” said Ms. Gilmore. “It is difficult to make a blanket statement that the cash position has doubled across all portfolios as each one has a unique situation. Due to our investment approach, we have significant levels of additional liquidity available if a portfolio were to experience outflows that exceed current cash levels.”
Karl Tourville, managing partner at Minneapolis-based Galliard Capital Management Inc., said the $35 billion the firm has in stable value is backed by a higher cash position than normal: between 10% to 15% of the portfolio, up from 5% to 7% over the last year. Mr. Tourville said the increase reflected the expectation that inflows would turn around and get reallocated when investors were ready to jump back into the equity markets.
Michael Dunn, spokesman for Boston-based BNY Mellon Asset Management, said the firm, with $16.2 billion in stable value assets, is holding more cash than it was three to six months ago. He declined to say how much.