Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. MONEY MANAGEMENT
November 14, 2011 12:00 AM

Schwab's exit aside, stable value rides wave of rising fees

Wrap providers find products bounce back from risky 2008

Douglas Appell
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Increasing: Matthew Gleason said insurers who offer 'bundled' wrap coverage have added more basis points of return.

    Charles Schwab Corp. became the latest provider of a stable value product to exit the business, but the difficulties in securing wrap guarantees the company cited in announcing it would liquidate its $7.6 billion fund aren't being felt across the board.

    Instead, industry watchers say a reversal of the wholesale retreat of banks and insurers from guaranteeing 401(k) participants against losses in these fixed-income-heavy capital preservation strategies is well under way.

    The rising fees that providers have been able to command for wrap coverage over the past few years are driving that rebound.

    Wrap providers found the risks they were facing in 2008 disproportionate to the six- to eight-basis-point fees charged then. But those fees are closer to 20 basis points today, which makes stable value a more attractive business proposition, noted Matthew Gleason, executive vice president with Burlington, Vt.-based Dwight Asset Management Co. LLC and head of the firm's $36 billion stable value business.

    That's especially so with insurers increasingly offering “bundled” wrap coverage, with the condition that some or all of the guaranteed stable value assets be managed by the wrap provider's affiliates, effectively adding another 20 to 30 basis points of return for the business, Mr. Gleason said.

    Against that backdrop, the financial crisis-inspired rush for the exits has stopped, and “people are trying to get into the business” of offering wrap coverage again, noted Christopher Tobe, principal with Louisville, Ky.-based Stable Value Consultants.

    Still, the rebound in wrap availability doesn't imply a return to the stable value industry's pre-crisis salad days, when securing guarantees was cheap and easy, industry veterans say.

    The hurdles insurers insist plan sponsors clear to garner wrap coverage remain much higher than before 2008, and commingled products in particular — like the Schwab Stable Value Fund — are facing greater difficulties securing a piece of that expanding pie than are big plan sponsors using separate account vehicles, those veterans say.

    Portfolio, wrap wed

    Stable value is “all about marrying the investment portfolio with the wrap,” and insurers underwriting that wrap want to look through to a retirement plan's participants to better weigh the risks they're taking on, noted Matt Toms, an Atlanta-based senior vice president and head of U.S. public fixed income with ING Investment Management. It's easier for an insurer to look at the demographics of a separate account than at those of a commingled fund that could be covering hundreds or thousands of smaller plan sponsors, he said.

    Another issue: Rules that allow smaller plan sponsors to exercise a 12-month put, which — in a scenario such as the one seen in 2008 — would allow the sponsor to cash out its participants' stable value investments dollar for dollar, when the portfolio's actual value was underwater, and park the funds in a new collective trust.

    An executive with a large stable value manager who declined to be named said separate accounts probably account for two-thirds of stable value investments, with the remaining third in commingled vehicles. It's the latter that are being shut down, he said, citing Schwab and DB Advisors' Pyramid Stable Value Portfolio as recent examples. DB Advisors, New York, announced to clients in March that the $1 billion Pyramid commingled fund would be closed.

    Dwight's Mr. Gleason said it wouldn't surprise him if smaller players in the industry are finding the post-crisis wrap environment more of a challenge. Negotiating and finding wrap capacity, negotiating contract terms and dealing with a growing number of investment restrictions increasingly requires a daunting level of complexity and deep legal expertise, he said.

    What was seen in pre-crisis days as a low-fee, low-maintenance product has become high maintenance, agreed Mr. Tobe.

    Market watchers say that complexity may well have contributed to the decision by Schwab to exit. Schwab had farmed out the management of the underlying assets to 11 managers, including Dwight, Neuberger Berman Group LLC and Standish Mellon Asset Management Co. LLC. Nine different insurance companies and banks provided wrap coverage.

    The lineup of stable value providers has been so steady over the years that any exit “raises an eyebrow,” but Schwab's decision is probably more a reflection of that firm's unique strategic situation than a harbinger for the industry, said Gina Mitchell, president of the Washington-based Stable Value Investment Association.

    Schwab's move might simply reflect that company's focus on distribution rather than manufacturing, Mr. Tobe said, noting that stable value heavyweights such as Galliard Capital Management and Invesco are doing just fine this year.

    The business is picking up in “no uncertain terms,” and Galliard has been putting contracts on with new wrap providers, noted Karl Tourville, managing partner with the Minneapolis-based firm.

    Industry watchers say the recent prolonged spike in market volatility and the near-zero returns being offered by money market funds — stable value's nearest competitor for the affections of capital preservation-seeking 401(k) participants — has added momentum to flows into stable value products this year.

    The industry is “going gangbusters,” Ms. Mitchell said.

    One barometer cited — the 1.5 million 401(k) plan participants with nearly $120 billion in combined assets at large U.S. companies tracked by Aon Hewitt — reflects that trend. In October, the Aon Hewitt 401(k) index showed 71%, or $307 million, of the money transferred by participants from one strategy to another during the month went into stable value funds, on pace with the previous quarter's $1 billion of inflows.

    In that sense, continued talk about difficulties in securing wrap coverage could reflect the industry's rebound, as opposed to the disarray of three years before.

    Volatility spurs demand

    The sharp pullback by wrap providers since 2008 is reversing but with volatility stoking investor interest now, demand is coming back faster than supply, noted ING's Mr. Toms.

    If that leaves smaller plan sponsors in a sticky wicket, bigger plan sponsors remain better positioned, even if securing wrap capacity has grown more complicated for them, market veterans say.

    Executives at some large defined contribution plans say the stable value remains a cornerstone of their 401(k) plans.

    Robin L. Diamonte, chief investment officer and director of pension investment for Hartford, Conn.-based United Technologies Corp.'s $37 billion in retirement assets, said: “Even with recent industry pressures around capacity and fees, the UTC Income (Stable Value) Fund remains a valuable and viable investment option within the UTC Savings Plan. Stable value funds offer participants a unique combination of par-value liquidity, principal protection and competitive yields.

    “We remain dedicated to the investment option in our plan.”

    UTC's stable value fund accounted for more than $7 billion of 401(k) participants' assets as of June 2011, roughly 45% of total defined contribution assets.

    Related Articles
    Aon Hewitt: DC participants push more into fixed income
    $7.6 billion Schwab Stable Value Fund to liquidate
    NetJets signs on with Schwab as 401(k) service provider
    J.P. Morgan drops put option for pooled stable value fund
    Updated stable value funds making a comeback
    Morningstar: Schwab's target-date funds in 'the hands of a novice'
    Invesco stable value fund to reopen to new investors
    Recommended for You
    BlackRock CEO Larry Fink
    Tough markets hit active asset managers striving for turnarounds
    Insight Investment brings on head of responsible investment research
    Yu Qing
    Franklin Templeton chooses head of China
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit