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Home > Library > Stable Times > Volume 5, Issue 1  The quarterly publication of the Stable Value Investment Association First Quarter 2001 • Volume 5 Issue 1 Japanese Stable Value Fund?…Not So Fast!By Robert McCormish, Certus It used to be that stable value assets under management grew at a healthy pace each year from double-digit yields and new cash flows alone. Now it is a struggle for stable value managers to achieve "organic" growth that equals the 6% to 7% yields on our funds. It used to be that we could rely on the growth of defined contribution assets to help offset the dilution caused by the dozens of new investment offerings. However, defined contribution annual asset totals went down for the first time from the end of 1999 to the end of 2000 (Federal Reserve Board data in the March 12, 2001 P&I Daily.) And, it used to be that stable value funds were exclusively located in North America. Well, that is still pretty much the case but I'd like to offer a little insight into how Certus found an opportunity to export stable value management over the border. When Certus was acquired by Mellon Bank (now Mellon Financial) in 1995, we believed we would have the opportunity to offer stable value management globally. This belief was largely predicated upon the international affiliations of our parent company. In particular, Japan held promise because of its conservative investor base and the swoon of their equity market. They seemed ripe for stable value product opportunities and we readily responded to various requests to design stable value products for distribution in Japan. However, in the first few years all of the product descriptions we delivered quickly died as there was no real demand for the level of fully- hedged returns we realistically could deliver. Now, suddenly (depending on your definition of "suddenly") we believe we are close to a stable value product launch in Japan. What's changed? Modifications to the following three areas have all contributed in a positive way. Product Design- Initially, we relied upon non-Certus intermediaries within our parent company to serve as the point of contact to the overseas offices. The direct contact between Tokyo and Certus was mostly through email. Consequently, we were consistently receiving product requests that were far off the mark of what we could deliver. In the last two years the overseas offices have become more fully staffed. As a result, there has been a steady stream of foreign sales/marketing people visiting Certus to learn about our products first hand. One of these visits resulted in the development of the product we are preparing for launch. The key factor appeared to be direct interaction with people that were actually going to contact the end users of the investment product. Lesson: Either Muhammad has to go to the mountain or vice versa. Target Markets – Originally it seemed to make the most sense to focus our efforts on participant directed retirement assets given our U.S. track record. However, it is well known that defined contribution-type plans still remain underdeveloped in most overseas markets. When we stopped focusing exclusively on participant-directed assets as our target market, we immediately held more promise for the international sales force. For the most part, they were trying to capitalize on their corporate relationships to sell U.S. investment management product. Once they became familiar with the stable value management concept, they were able to successfully integrate stable value products into their line-up. As a result, we see many more promising international opportunities, even though they are not coming from participant directed retirement assets. Lesson: Sometimes, even an old dog can learn new tricks. External Service Structure – Because we have a great deal of experience in quickly setting up trust vehicles in the U.S., we always assumed this would be the preferred fund structure for an international product. Similar to many of our other preconceptions, this assumption was also proven to be incorrect. In addition to the overseas sales/marketing assistance, it became essential to have other overseas partners that had blazed some of the international fund development trails before. Our parent company affiliates are helping with the currency hedging and the offshore trust at a level of competency and speed we could not duplicate. This has allowed us to put the product together in a reasonable amount of time (reasonable is defined as "before the opportunity slips away".) Lesson: You get by with a little help from your friends. The international product we expect to eventually offer is a vastly different product than we originally envisioned for the Japanese market. (A sense of propriety prevents me from intricately describing it, but I'll give some idea of its shape.) The product is for corporations, not individuals. It is a fixed maturity trust, not an ongoing fund. The assets will come from pension assets, not retirement savings. From the currency perspective it is partially, not fully, hedged. Finally, the site of the trust is in Ireland, not in Japan or the U.S. To be sure, some of the essential items mentioned above can not be easily replicated. I would even contend that without a fairly substantial international commitment from a corporate affiliate, any time spent on trying to offer an international stable value fund is fruitless. For, while there are many uses for products similar to stable value, most investors are interested in traditional equity and fixed income investments. I believe that to identify those opportunities that are truly "stable value" requires individuals domiciled in the respective target countries. To sell that product will require a developed distribution channel maintained by other "in country" people. Finally, it will take an overseas service support group to assemble the proper structure to house the assets that you expect to acquire and manage. Certus fully expects our efforts will be worth the eventual outcome. When the concept of stable value management was first formed and promoted nearly twenty years ago, there was strength in numbers. Similarly, we believe that to make stable value an international asset class many of the U.S. stable value service providers (our competitors included) will need to participate. Good luck to us all.
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