Asset TV posted a new "Masterclass video on "Stable Value," which features an interview with Invesco's Head of Stable Value Client Service Andy Apostol and MetLife's National Director of Stable Value Markets Wayne Howe. Host Susanna Lee comments, "Equity markets experienced a significant amount of volatility, especially in the fourth quarter.... It's a rare occurrence that stable value is one of the top performing asset classes relative to both equities and core bonds." We excerpt from the transcript of the sponsored interview below, and we also quote from a press release from online money market fund trading portal ICD.
MetLife's Howe explains, "Stable value has a lot of advantages, and it's always a good idea to have a stable value option in your defined contribution plan, especially when you think about plan sponsors who need to have a capital preservation option in the lineup. Typically, it's either going to be stable value, a short-term bond fund or money market funds. When you look at the three of those, stable value is clearly the superior alternative in that case. As Andy was talking about when we looked at the volatility in the market late last year, that's the key thing there when you think about a stable value fund. What does it provide? It provides a safe haven, capital preservation, and a reasonable return for participants."
Invesco's Apostol comments, "Stable value has met all of its objectives, providing positive returns on a daily basis over its inception. Strong equity market performance has resulted in significant transfers out of the stable value asset class.... Historically, stable value funds have produced returns that are roughly 100 to 150 basis points over money market funds. But if we look at the yields on money market funds, and yield on stable value funds from a historical context, the fed easing of monetary policy that happened after the financial crisis really created a decade for money market funds of almost a zero percent return.... That difference between earnings on money market funds and stable value funds has driven that difference to historical-wide."
He adds, "We also looked at return differences relative to inflation. Stable value funds have the typical risks, credit risks, the crediting rate risk, the lagging, lagging risk of market interest rates. But in terms of interest rate risks, that's often overlooked when you look at a capital preservation option."
Howe tells us, "Money market [funds are] the prime alternative to stable value in terms of [the] capital preservation space.... So when you look at those comparisons, that's a comparison to what would be your prime money market funds. `After money market reform in 2016, plan sponsors that are using money market are now in government money market funds. That return likelihood of money market funds themselves is likely to be lower by the nature of being in government-only funds as opposed to the previous prime funds.... Typically it's the plan sponsor making the decision. Is it going to be stable value or is it going to be money market? Many times ... they will offer both and let participants make the decision."
He continues, "What you see is 'money market' is easily understood: it's available outside of retirement plans, everybody knows what it is, and they think of it as safe.... Sometimes stable value is a little bit more complicated to explain, and one of the things we're both working on is educating plan sponsors about the value. Because with stable value you're getting these increased returns somewhere in the neighborhood of 200 basis points more over time, which is real return for participants, yet you have that advantage, and you have the liquidity that goes with money market for all plan-initiated events. You really don't need the money market option in place, and when plan sponsors understand the difference between stable value and money market, they'll opt for stable value."
Regarding the investments, Apostol explains, "Stable value funds have two primary investments: you have the benefit responsive wrap contract, and that is paired with a portfolio of high quality fixed income securities. Each of those two assets are gonna provide some unique characteristics to the stable value fund. For example, the benefit responsive wrap contract is gonna provide a zero percent floor crediting rate. It is also the mechanism that, as bond prices move up and down relative to changes in market interest rate, it's gonna provide that smoothing out effect in terms of the crediting rate that participants earn.... Switching to the underlying assets again, as we talked earlier, that's a portfolio of high credit quality fixed income securities. That component of the portfolio provides really the return generator behind the stable value funds."
Finally, Howe states, "The accounting rules that allow stable value to exist [is] such that it is only available in a defined contribution plan. You cannot get this outside of defined contribution, and that's an important thing. Plan participants that remain in their plan post-retirement, and wanna keep their balances there, they still have access to stable value. If you roll your money out into an IRA, you're no longer gonna have stable value available to you."
In other news, A press release entitled, "ICD Achieves 28% Asset Growth in 2018, Widening Position as Largest Independent Trading and Investment Risk Management Provider in the World," tells us that, "ICD, the leading independent trading and investment risk management platform, today announced 28% growth in investment assets last year, widely outpacing the .02% market increase in institutional money market fund use. Fueling this growth, the company increased its client base by 20%, many of which came from Fortune 500 and FTSE 350 companies. ICD growth was not only driven by net new assets, but by existing clients increasing their investment through the ICD Portal, with average client assets on the portal increasing by 12% YOY."
It explains, "ICD CEO Tory Hazard attributed the strong client growth to CFOs, Treasurers and corporate investment professionals seeking a secure, centralized investment platform, deeply integrated into their treasury technology environment. Growth was further fueled by corporate treasury organizations focusing on yield, moving funds out of low-return bank deposit products into higher-yielding money market funds. Another theme among new and existing clients was a move longer out on the maturity curve, with renewed interest in Prime Funds and Short Duration Bond Funds versus traditional government-backed products.
Hazard comments, "We could not be happier with the response from our clients and the corporate treasury community as a whole. This past year was a testament to the movement that we recognized over 16 years ago when ICD's journey began. Treasury professionals want an independent investment and risk management solution that offers a wide selection of investment options on a secure platform, wrapped in a global support infrastructure. The market shift away from biased bank portals and concentrated bank deposits seems to be increasing, and fund companies want to offer their investment products in a neutral marketplace. ICD is committed to continuing investment in personnel and technology and support infrastructure to meet the needs of our expanding client base." The release adds, "Additional 2018 highlights include: 99.6% Client Retention Rate, 25% Employee Growth, and a New Technology Development Facility."
