For many companies in the stable value market, the glass is either half-empty or half-full when it comes to the industry.
Since the beginning of the year, at least three companies have entered the wrap and fund markets, saying industry conditions have stabilized sufficiently. At the same time, several others have dropped out, citing uncertainty or what they view as adverse conditions.
“There will be other entrants in the wrap market over time,” said Matthew Gnabasik, managing director of Blue Prairie Group, Chicago, a retirement and investment consulting firm, referring to the insurance products that guarantee the book value of the underlying bond investments.
Among wrap providers, Bank of Tokyo-Mitsubishi UFJ, Tokyo, and Reinsurance Group of America Inc., Chesterfield, Mo., entered the market this year, while J.P. Morgan Chase, New York, is getting out. American International Group, New York, which had been drastically reducing its wrap business in recent years, is now trying to grow it.
Among the stable value fund providers, Charles Schwab and Union Bank, both of San Francisco, liquidated funds. Pacific Investment Management Co. LLC, Newport Beach, Calif., recently launched a fund.
“I think it's improving,” said Karl Tourville, managing partner of stable value and fixed-income management firm Galliard Capital Management Inc., Minneapolis, referring to the wrap market. “We have had some more (wrap) issuers, and some providers are expanding.”
Mr. Tourville said the wrap provider market's composition is changing as insurance companies take a more prominent role while banks are pulling back. “The banks have really withdrawn from the market and are concentrating more on traditional lines of business,” Mr. Tourville said.
Following the economic crisis of 2008-"09, the amount of available wrap coverage declined. Although some firms have entered the wrap market in recent years, consultants and providers say there is still room for more coverage.
“The market for wrap capacity continues to be challenged,” said Sue Walton, a Chicago-based senior consultant with Towers Watson Investment Services Inc., a subsidiary of Towers Watson & Co. “There is an excess of demand.”
New wrap providers and those expanding their business are encouraged because fees are higher than they were several years ago. They also have been able to insist on stricter contracts, implementing, for example, tougher rules for sponsors' offering competing investments such as money market mutual funds or short-term bond funds.
Other examples of the more conservative approach dictated by wrap providers include portfolios with shorter bond durations and higher overall portfolio credit ratings than in the pre-crash years, Mr. Gnabasik said.
“No one loves tighter wrap contract provisions,” said Winfield Evens, director of HR outsourcing investment strategy at Aon Hewitt, Lincolnshire, Ill. “But if it's that (accepting a strict contract), or giving up the option, sponsors accept it.”
Surveys conducted every two years by Aon Hewitt show that stable value remains a popular choice among DC plans. Eighty percent of the plans in Aon Hewitt's 2011 survey offered a stable value option, and of those plans, an average 20% of a plan's assets were in stable value.
Mr. Gnabasik added that his defined contribution plan clients' use of stable value is “strong and healthy,” representing 20% to 25% of total plan assets.