Wrap Issuers See Healthy Stable Value Market
By Randy Myers
- Karen Edgerton, Vice President, Stable Value Marketing, RGA
- Claudia Farias, Vice President, Stable Value Wrap Group, State Street
- Lacey Lockward, Vice President, Stable Value, Prudential Financial
- Brian Murphy, Vice President, Corporate Development, National Life Group
- Mark Pherson, Vice President, Transamerica Stable Value Solutions, Inc.
- Kostas Sophias, Executive Director, JP Morgan Chase Bank Fixed Income Structuring and Sales
Moderator: Nick Gage, Senior Director, Stable Value Account Strategy, Galliard Capital Management, Inc.
Issuers of stable value wrap contracts view their asset class as being in decidedly good shape, but not without challenges.
“Improvements in the industry since the 2008 financial crisis have been notable,” said Karen Edgerton during a panel discussion of industry trends at the 2017 SVIA Spring Seminar. “Portfolios are in really good shape in terms of average credit quality, duration—all the metrics we carefully monitor. Contract terms are much more well-defined, and if we’re confronted with issues we know what the next steps are to deal with them. Issuers also are collecting much more data on what’s in stable value portfolios, which will be helpful in the next crisis.”
Edgerton also noted that management teams at stable value wrap issuers are much more informed about the asset class than they were a decade ago, which has helped in the effort to bring new entrants into the market and boost wrap capacity. Some issuers said they have even become comfortable negotiating some modest loosening of investment guidelines with stable value managers, while still insisting that those guidelines don’t allow managers to invest outside the issuer’s tolerance for risk.
Looking to the future, Kostas Sophias said he expects market-value-to-book-value ratios for stable value portfolios to fall below par, on average, in the years ahead. But he and other panelists indicated they didn’t see that as a problem.
The biggest challenges facing the industry, the wrap issuers said, include fee pressures, the declining share of new money flowing into stable value funds, and the need to simplify stable value to make it easier for retirement plan sponsors to understand it and add it to their investment lineups. A core concern in the latter area is the equity wash rules that most funds impose on transactions into and out of competing funds.
Lacey Lockward said her firm is reevaluating how it classifies and handles competing funds. But, she cautioned, any change to the current approach would need to be backed by supporting data and analysis that is persuasive not only to stable value business leaders but also to the senior leadership of the firm. Given that many stable value funds depend on wrap contracts from multiple issuers, she added, any new approach would likely need to be embraced industrywide to be successful.
Claudia Farias said her group would be agreeable to rethinking how the industry defines and handles competing funds, but also would need data to support any changes.
Brian Murphy, in agreement with many of the issuers, offered that standardization of stable value products could offer many benefits for the industry and its constituents, including making stable value easier for plan sponsors to understand and use. But several issuers questioned whether it’s truly the best path forward. Mark Pherson noted that the industry’s ability to customize products to the unique circumstances of plan sponsor clients can be a virtue. “I think standardization takes away one of the attractive things about our asset class—its unique problem-solving ability. I don’t know if it would help us grow the asset class,” he said.
Still, growth of the asset class, all of the issuers agreed, will be important moving forward. To ensure that it happens, the issuers said the industry needs to explore a wide range of opportunities. These include incorporating stable value in target-date funds, positioning stable value as an income generator for plan participants who are in retirement, and introducing or expanding stable value into new or underpenetrated markets, including retirement plan markets outside the U.S., college-savings 529 plans and health savings accounts.
Murphy suggested it also would behoove the industry to continue working to have stable value designated as a Qualified Default Investment Alternative by the Department of Labor, which presumably would make it more attractive to plan sponsors because it would then provide fiduciary safe harbor protections for sponsors. In opening the 2017 Spring Seminar, SVIA Chairman Steve Kolocotronis, vice president and associate general counsel for Fidelity Investments, said the SVIA is continuing to explore that issue.