Wrap availability puts stable value back on map

Three stable value fund managers have this year lifted “soft closes” that prevented investments from most or all new clients, moves seen illustrating the continued strengthening of the stable value market.

A primary source of an improved market — and a key reason for ending some soft closes — is the greater availability of wrap insurance, which guarantees to participants the book value of the underlying stable value investments. And as stable value wrap capacity has grown, so has the amount of stable value assets under management.

“The market has stabilized,” said Cynthia Mallett, vice president of industry strategies and public policy for MetLife Inc., New York, whose company provides a combined $48.6 billion in wrap insurance and stable value investments. “Wrap capacity has always been elastic. We're at a nice equilibrium now.”

David Ferry, senior director at Galliard Capital Management Inc., Minneapolis, agreed. “It's a better environment than it was three or four years ago,” said Mr. Ferry. Galliard has $78.8 billion in stable value assets under management.

Insufficient wrap capacity was identified by some managers as the main reason for imposing soft closes, and adequate capacity was cited as encouraging the reopening of funds.

In April, Bank of New York Mellon reopened its $1.05 billion stable value fund to all new investors due to improved wrap capacity, said spokesman Mike Dunn. The fund initiated a soft close in January 2012. The fund, managed by the company's San Francisco-based Standish Mellon Asset Management, was reopened to new investors in segments, based on how much they were investing.

In January, T. Rowe Price Group Inc., Baltimore, reopened its $11.1 billion fund to all investors. In mid-2009, T. Rowe stopped taking investments from new defined contribution investment-only clients. One reason for lifting the soft close was the greater availability of wrap insurance, said spokesman Brian Lewbart. DC investment-only clients account for about 10% of the fund's assets.

Wells Fargo & Co., San Francisco, reopened its $29.2 billion fund in the first quarter, after having closed it to most new investors in early 2013 because of concerns about low interest rates. When rates rose in mid-2013, Wells Fargo executives reconsidered the decision. Wrap capacity was not a problem for the fund, said Galliard's Mr. Ferry, whose firm is the subadviser to the Wells Fargo fund.

Another firm lifting a soft close is Invesco Ltd., which reopened its $6 billion Invesco Stable Value Trust Fund in May 2013 to new investors. The soft close, imposed in April 2011, was due to “industrywide constraints” on wrap capacity.

For this fund, Invesco took an extra step to get more wrap capacity. It requires DC plans wishing to exit the fund to give 24 months' notice — instead of the typical 12 months — to receive the book value of their investments. The purpose of this 24-month put option was to give wrap providers more time to manage payments to DC plans exiting the fund and to protect the remaining plans and their participants.

Invesco has $48 billion in stable value assets under management, of which $37 billion is in separately managed single-plan stable value accounts and $11 billion is in several pooled funds, including the Stable Value Trust Fund, said Stephen LeLaurin, the Louisville, Ky.-based managing director of Invesco's stable value group. One other Invesco fund has a 24-month put option; the rest have 12-month options.

The current economic environment, however, doesn't embrace all stable value funds. In December, citing problems in obtaining wrap insurance, Northern Trust Corp., Chicago, said it would liquidate its $900 million stable value fund effective June 30.

Still, there's growth in wrap capacity and in the number of wrap providers in recent years, according to the Stable Value Industry Association, Washington. Last year, 22 firms wrote $544 billion in wrap contracts, said Gina Mitchell, the association's president.

For 2012, the association counted 20 wrap providers writing $443 billion in contracts. In 2011, there were 18 providers writing $424 billion in wrap contracts, she said.

As wrap capacity has gone up, so have stable value assets under management. Among association members, AUM reached a record $719.4 billion last year, Ms. Mitchell said. That's a one-third increase since the AUM hit a post-economic crisis trough of $539.8 billion at the end of 2010. Association members account for 80% of stable value assets under management, she said.

“The wrap market endured the economic crisis” of 2008 and 2009, said Scott Sokol, the Los Angeles-based managing partner of Valerian Capital Group LLC, a consultant to wrap providers. As some providers dropped out or cut back, new players entered the market, he said. Plus, some existing providers increased their wrap offerings.

Following the economic crisis, providers began raising fees, writing contracts that placed greater restrictions on defined contribution plans offering competing options, and insisting on bond portfolios that had shorter durations and higher quality.

“Wrap capacity isn't about the amount of assets being wrapped - it's about the nature of the investments being wrapped,” said Ms. Mallett of MetLife.

There had been “some fairly exotic (stable value) assets” in the past, but, after the economic crisis, “nobody wanted to wrap high-yield bonds or equities in a conservative stable value investment,” she said.

The environment has improved sufficiently so that Nationwide Mutual Insurance Co., Columbus, Ohio, began expanding its wrap-writing business during the fourth quarter of 2013, said John Carter, president and chief operating officer of Nationwide's retirement plans unit.

Although Nationwide had been offering wrap contracts to “very select clients for nearly 10 years,” Mr. Carter said current market conditions encouraged his company to cast a wider net. “We think it's something plans and participants want.”

Nationwide had been writing about $1.5 billion in wrap contracts for those selected clients, said Kevin O'Brien, chief financial officer of the retirement plans unit. He expects Nationwide to have written $2.5 billion in new business by the end of May. The goal is a total wrap business of $8 billion to $10 billion within 24 months, he said.

“As the wrap market evolved out of the financial crisis, there was more rational pricing” for wrap contracts, said Mr. O'Brien, referring to wrap providers raising their fees.

Stable value experts say typical wrap fees have been in the range of 20 to 25 basis points for a few years, up from single digits prior to the economic crisis. “When the fees first went up, there was a lot of anxiety” among DC plan executives, said Invesco's Mr. LeLaurin, commenting about market trends. “Now, there's hardly any discussion about it.”

Jacob O'Shaughnessy, an adviser at Arnerich Massena Inc. in Portland, Ore., said he had seen some wrap providers be a bit more flexible in pricing and less “onerous” in writing contracts. Today, wrap providers “are willing to take a little more risk” in insuring stable value products, he said.