By Randy Myers
For years, Morningstar Investment Management has made stable value a key component of many of the investment lineups it creates for retirement plan investors through its managed accounts program. Moving forward, it will be able to do so with even greater insight into the makeup and performance of those funds.
Morningstar Investment Management’s parent company, Morningstar Inc., announced in February 2020 that it was acquiring Hueler Associates’ Stable Value Comparative Universe Data and Stable Value Index. The former collects data on a broad range of stable value products, including pooled funds, insurance company separate accounts and general account products. The latter is a stable value index derived from aggregate returns of contributing stable-value providers dating back to 1983.
Speaking at the SVIA 2020 Fall Forum in mid-October, James Smith, senior vice president and global head of sales and strategy for Morningstar Investment Management, said the Hueler acquisition will be particularly useful for the three core products the firm offers through its Workplace Solutions group: managed accounts, target-date modeling, and fiduciary services. (Fiduciary services builds investment lineups for defined contribution retirement savings plans.) Stable value plays a role in all three of those Morningstar businesses, although managed accounts is the largest in terms of assets under management or advisement. It is an online offering that provides retirement advice and ongoing management of a plan participant’s retirement portfolio.
Unlike target-date funds, which are popular investment options in retirement plans but are constructed largely based on just one variable—the length of time until a participant’s retirement—managed accounts are highly customizable and can take into consideration far more information about a plan participant’s financial circumstances. Managed account services are growing for a variety of reasons, Smith observed, including demand for customizable solutions from plan sponsors and participants, as well as a growing emphasis on services that can help retirees with the asset decumulation phase of their retirement journey. Plan sponsors also like the fact that managed accounts providers accept fiduciary responsibility for their recommendations.
In its own managed account offering, Smith said, Morningstar believes stable value provides good diversification in plan participants’ accounts due to its low correlation with other asset classes. Morningstar tends to steadily increase its use of stable value investments for participants as they age, from about 10% of account assets when a participant is 35, on average, to a little over 25% by the time they are 70. He cautioned that there is no single allocation or glide path in stable value that is the same for every participant or plan. Rather, glide paths and allocations are “based a lot on personalization at the participant level and the specific stable value product in their plan, and how it fits into the plan’s broader investment lineup.”
On the other hand, he noted, Morningstar’s allocations to stable value are, well, stable. “This is a long-term strategic allocation, so regardless of market activity over time we’re slowly buying in more and more stable value,” Smith said. “That slow increase in allocation makes it very predictable, and something stable value managers tend to value. We are not making short-term bets. We are not moving in and out of stable value one quarter to the next, or one year to the next.”
Investors in managed accounts tend to be steady in their asset allocation decisions, too. Following the stock market turmoil that erupted in the first quarter of 2020 in response to the COVID-19 pandemic, Smith said, Morningstar analyzed how individual plan participants responded. Participants were divided into two groups—a “do it for me” group that included investors whose assets were allocated entirely to a managed accounts program or a target-date fund, and an “I got this” group who were managing asset allocation decisions on their own. Within the “do it for me” group, only about 2% of participants made a change to their asset allocation mix in the first quarter, including only 1.3% of those using Morningstar’s managed account service. Within the “I got this” group, about 17% of participants made changes.
Within that self-directed group, decisions may not have been favorable for long-term results. As Smith explained, participants ages 60 and older tended to make the biggest withdrawals out of equities and into something else meaning that many likely sold while stock prices were depressed, locking in losses. Do-it-yourselfers between the ages of 60 and 64 who had 90% of more of their assets in equities at the start of the year, for example, reduced their equity allocation by nearly 43% during the first quarter. “You saw them pull back pretty significantly out of equities, which was arguably the worst time to do it,” Smith said.
Smith concluded by noting that Morningstar launched a new distribution channel this year that will provide further opportunities for stable value providers to get their products into plan participants’ hands. Morningstar is now making its managed account modeling capabilities available to plans and plan participants through registered investment advisors and consulting firms as well as through its existing delivery channels. Those two provider groups, he said, have proven open to allocating to stable value products within the models they build using Morningstar’s service.
“I think it presents a pretty significant opportunity, not only for us on the managed account front, but also for stable value firms like yours, because you’re getting in front of the large RIA firms and consulting firms,” Smith said. “And by the way, they are not just using investments already in the plan lineup. They are open to adding additional asset classes or funds in the models they build.”
Thanks to the Hueler acquisition, Smith said Morningstar now has access not only to more data about stable value funds but also more up-to-date data. Kelli Hueler, founder of Hueler Associates, joined Smith in speaking at the Fall Forum. She said she has been impressed by Morningstar’s commitment to maintaining the integrity of the Hueler database and index, and told her SVIA colleagues, “I have confidence that you are going to be very happy with the end result.”