State Street Global Advisors' 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 SSgA's clients, which had more than $8 billion in stable value with the firm as of March 31.
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,” spokeswoman Arlene Roberts wrote in an e-mail.
On a positive note, the 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 wrote.
SSgA is recommending that clients “immunize their accounts immediately and convert to money market instruments in order to preserve current favorable market value,” Ms. Roberts wrote, adding that they also can choose to transfer assets to another stable-value manager.
The firm is looking to complete the winding down of its stable-value operation by the end of the year.
In sister publication Pensions & Investments' latest annual money manager survey, SSgA was the 13th-largest stable-value manager, with $9.9 billion in assets. That total had fallen to $8.4 billion as of March 31.
Donald C. Perrine, director of investment management with FirstEnergy Corp., said that his firm switched to another provider at the beginning of this year, before SSgA said it would 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 DC assets as of Sept. 30, or $582 million, were in stable value.
Other clients are opting not to reveal their hands for now.
Michigan uses SSgA's stable-value strategy as an option in its 401(k) 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 of the Office of Retirement Services at Michigan's Department of Technology, Management and Budget, wrote in an e-mail. He declined to say whether Michigan is moving to a new stable-value manager or considering a money market option.
Although 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 the 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 it should best marshal the company's resources than it does about stable value, said Gina Mitchell, president of the Stable Value Investment Association.
NO OBSTACLE
Not offering the product should not prove an obstacle to SSgA's DC business, said Matthew Gnabasik, a managing director with Blue Prairie Group LLC, a retirement consulting firm.
The broader story is a Darwinian one: Stable-value managers that were investing in riskier assets in search of higher returns three or four years ago are getting shorter shrift now from wrap providers, consultants and clients than those managers focused more on capital preservation, he said.
With fees charged by wrap providers to guarantee stable-value products doubling or even tripling over the past year, difficulties in obtaining those guarantees are gradually dissipating.
Many stable-value managers describe that progress as promising but tentative.
But James King, vice president and head of Prudential Retirement's stable-value-markets group, said that there has been significant improvement in wrap capacity, with a number of new entrants — including some foreign banks — seriously thinking of offering wrap guarantees.
Meanwhile, the increased restrictions that guarantors are demanding with regard to the types of investments that managers can make are strengthening the industry, they said.
The industry is far healthier than it was a year or two ago, whether in terms of market to book value, credit quality or the availability of wrap guarantees, said Karl P. Tourville, managing partner and senior portfolio manager with Galliard Capital Management Inc. The firm had $39.1 billion in stable-value assets as of Dec. 31.
With a raft of regulatory proposals floating through Congress that could affect stable value, some observers said that the situation remains fluid.
A plan sponsor that doesn't have a stable-value option now may be well-advised to wait for the dust to clear before putting one in, said Roger Williams, an investment consultant with RogersCasey LLC.
Douglas Appell is a reporter at sister publication Pensions & Investments.
