SSgA's decision to urge its defined contribution clients to use money market instruments as their “safe” option now that the firm has closed its stable value business could be a hard sell with prevailing money market returns near zero.
Competitors predict a flurry of requests for proposals from State Street Global Advisor's clients, which had more than $8 billion in stable value with the firm as of March 31.
Spokeswoman Arlene Roberts said in an e-mail that the timing of SSgA's “strategic decision” to exit the stable value business reflected “current market conditions,” including the “persistent challenge in obtaining new wrap insurance capacity.”
On a positive note, the current strength of SSgA's stable value funds, with market values exceeding book values, will leave clients with a full set of options for an orderly transition, she said.
SSgA, Boston, is recommending that clients “immunize their accounts immediately and convert to money market instruments in order to preserve current favorable market value,” Ms. Roberts noted. She added they also can choose to transfer assets to another stable value manager.
The firm is looking to complete the wind-down of its stable value operation by the end of 2010.
That total fell to $8.4 billion as of March 31. Donald C. Perrine, director-investment management with Akron, Ohio-based FirstEnergy Corp., said his firm switched to another provider at the beginning of 2010, before the Boston-based giant announced its decision to leave the business. According to P&I's latest survey of the biggest U.S. pension funds, 27% of FirstEnergy's $2.2 billion in defined contribution assets as of Sept. 30, 2009, or $582 million, were in stable value.
Other clients are opting not to reveal their hands for now.
The State of Michigan uses SSgA's stable value strategy “as an option in its 401k and 457 plans,” but as “we are in the midst of the transition, we are in the quiet period, so we must limit our comments,” Phil Stoddard, director, office of retirement services at Michigan's Department of Technology, Management and Budget, Lansing, said in an e-mailed response to questions. He declined to say whether Michigan is moving to a new stable value manager, or considering a money market option.
With money market returns near zero, an executive with one competitor, who declined to be named, predicted most SSgA clients will be looking for new stable value managers, adding to the pent-up demand that's emerged during the past few quarters after extreme market volatility suppressed the normal pace of turnover in recent years.
While SSgA's $8.4 billion in stable value assets isn't minuscule, it represents less than 1% of total assets. Moreover, stable value is one of a number of fixed-income areas into which the parent company had to pump capital — $610 million — during the market volatility of 2008.
Investment consultants and competitors painted SSgA's exit from stable value as a decision by that company to focus on its core strengths, rather than a broader industry story.
SSgA's exit probably says more about the facts and circumstances surrounding the firm, and its leadership's conclusions as to how they should best marshal the company's resources, than it does about stable value, said Gina Mitchell, president of the Washington-based Stable Value Investment Association, in a recent interview.