Stock market crash could help stabilize value

Capital preservation trends have prompted consultants and advisors to overwhelmingly favor stable value funds over money market funds.

A survey released in May by Pacific Investment Management Co. LLC, Newport Beach, Calif., reported that 81% of large DC plan consultants said stable value was their top choice for capital preservation compared to 15% for funds. of the money market. PIMCO surveyed 26 DC consultants who represent clients with $5.7 trillion in assets.

The same attitude held true for a follow-up survey by PIMCO of 10 smaller plan consultants and advisors responsible for $1.2 trillion in client CD assets. Seventy-eight percent said stable-value was their top choice and 22% preferred money market funds.

Conversations with DC consultants often yield the words “long-term investor” when discussing their preference for stable-value funds over money market funds.

Most Callan LLC customers only offer stable value, and that’s the company’s usual recommendation, said Kyle Fekete, San Francisco-based vice president and chief research officer. “Generally we won’t see that kind of movement because they’re long-term investors,” Fekete said, citing his doubts that sponsors could move from stable value to money market funds if interest rates continue to rise.

As interest rates rise, “there could be some repricing by sponsors,” said Mr O’Meara of Willis Towers Watson, referring to the prospect of improved yields on money market funds. “We don’t encourage market timing.” The majority of its clients offer either stable value or money market funds, but not both.

Mr. O’Meara did not identify a tipping point that might prompt participants to change. Possible selling points for money market funds are that they are more easily understood by participants and that sponsors believe a money market fund would be more familiar to participants, he said. Mr. O’Meara recalled the strategy of a client who still remembers the economic crisis of 2008-2009 and who insisted on offering only a money market fund. “You can’t argue emotionally,” he said.

Even if interest rates and money market rates improve, Invesco’s Jenkins said he doubts participants will switch back and forth between stable-value funds and money market funds, and he doubted that the sponsors would switch because of the difference in returns between the two options. .

“In this type of environment, you’re not trying to trade” among capital preservation options, Jenkins said. “I think most managers are preparing for this (rising) environment.”

Stable value providers hedge against massive changes in participants with an “equity wash”. This is a requirement that plan participants who wish to switch from a stable value fund to a money market fund must first place their money in a non-competing investment, such as an equity fund, for a certain period – usually 90 days – before investing in the money market fund. Putnam Investments, for example, requires a 90-day stock cleanup for clients who want both a stable value fund and a money market fund, said Steven McKay, head of global contribution investments. defined in Boston only.

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