By Randy Myers
Christina Burton, a director and a member of the stable value contract team at Galliard Capital Management, characterizes the current market environment for stable value as one of the most challenging she’s ever seen. Market-to-book ratios for stable value portfolios are at the lowest levels she’s witnessed over her 15-year career, thanks to the sharp rise in interest rates since March 2022. The yield curve is inverted, which often foreshadows a recession. And stable value funds collectively have been experiencing net cash outflows over the past year.
But those challenges haven’t been insurmountable. Speaking during a panel discussion at the 2023 SVIA Fall Forum, Burton said she and her colleagues at Galliard are managing through all these developments, in large part by ensuring their portfolios have enough liquidity to meet withdrawal demand without the forced sales of assets. Among other things, Galliard’s investment managers are focusing on holding higher-quality, shorter-duration assets that generate plenty of principal and interest. They’re also matching cash levels in their portfolios to fit the cash flows and demographics of the plans in which their stable value funds are held. And, she said, they’re avoiding duration bets.
Representatives of other stable value managers and wrap providers shared similar stories during the panel presentation—stories about how they’re working to ensure that stable value continues to deliver what it promises for the millions of retirement plan participants who invest in the asset class. And stories about how they’re succeeding.
“Stable value is continuing to do what it’s supposed to do, which is to provide capital preservation, book value stability for plan participants, stable and consistent returns over time, and liquidity benefits for those plan participants regardless of volatility in the market,” said Yolanda Reyes White, a relationship manager with Principal Morley.
Stable value managers and wrap providers also are keenly alert to other risks that lurk on the horizon. Asked by Maya Pillai, assistant vice president and head of the stable value wrap business at Pacific Life, which risks are most top of mind right now, Paul Grigely, director and relationship manager with MassMutual, pointed to the divergence between stable value and money market returns. The sharp rise in interest rates has sent money market yields shooting above the crediting rates on stable value funds over the past year. That’s prompted some retirees to transfer money out of their stable value funds—and out of their employer’s retirement plans—and into money market funds in individual retirement accounts.
Grigely added that it also would be concerning if interest rates were to rise further and lead to even wider spreads between market values and book values in stable value funds.
Like Galliard, MassMutual is working to manage all the risks it’s facing as a wrap provider right now. It’s scrutinizing its underwriting, Grigely said, and working with its stable value managers to make sure they’re managing liquidity risk. It’s also monitoring the assets in the portfolios it wraps at a granular level to carefully assess risk on that front.
Mark Wojciak, director, strategic relationships at wrap provider Prudential Financial, said his firm considers the portfolios it wraps to be in healthy shape.
“We like that there’s sufficient (wrap) capacity out there,” he added, noting that this represents a contrast from what happened during the Great Financial Crisis in 2008, when wrap capacity shrunk. He also pointed to a refreshing level of comfort with the stable value business within the ranks of Prudential’s senior management because of how transparent the business has become.
Reyes White noted a similar comfort level among retirement plan consultants and advisors, whose questions about market-to-book ratios have slowed. She attributed that slowdown to the industry doing a good job of explaining how the challenges it is facing today are different from those it faced during the 2008 crisis. The Great Financial Crisis was a credit-driven event, while current challenges are being driven by interest rates.
Morley, too, is carefully managing liquidity and duration in its stable value portfolios, Reyes White noted.
For all the challenges the stable value industry faces, the panelists said it also has opportunities. Reyes White mentioned that her firm remains optimistic that Congress will eventually pass legislation to allow 403(b) retirement savings plans to invest in collective investment trusts (CITs), including pooled stable value funds. Right now, 403(b) plans can only invest in registered funds and annuities, which leaves stable value funds unavailable to them.
Wojciak said there’s also an opportunity for stable value funds to secure a bigger presence in 529 college savings plans. He suggested that many parents and grandparents saving for a child’s education might appreciate having it as a capital preservation option in their 529 plan’s investment lineup.
“There are 107 plans out there, and only 47 of them hold stable value currently,” Wojciak said.
Finally, Wojciak noted that Prudential continues to believe that stable value funds could play a bigger role in target-date funds and as a vehicle for generating retirement income.
“There are a lot of opportunities to expand the (industry’s) base,” he concluded, “We’re hoping everyone is thinking outside the box.”