Tony Luna was happy to elaborate when asked about stable value strategies currently when compared with where they once were, especially given the 2008 financial crisis and—more recently—the economic fallout from the worst global pandemic in a century.
Luna, a portfolio manager and head of the Stable Asset Management team in the Fixed Income Division of T. Rowe Price, knows the space well and ticked off just a few reasons why it’s once again gaining traction.
“In this environment, the Fed has cut interest rates to zero, and stable value has a gross yield of 2%,” he began. “That’s the leader, but I also think, psychologically, the Fed cutting rates to zero two times now within about 10 years means that stable value is definitely a tool in the toolbox.”
Little surprise, as plan sponsors and participants age, they appreciate the idea of income stability and at least some kind of yield. Luna claimed stable value checks all of those boxes, and that’s why he sees renewed interest.
“Like many asset classes, stable value was impacted by the 2008 financial crisis, and we had wrap providers leave the market,” he added, before admitting, “The indusrty had some managers who invested in subprime, so stable value was tainted.”
Last March and April was really the first test since the 2008 financial crisis, but he noted there’s more capacity now, fees aren’t as expensive, and managers “didn’t have any blowups. So I feel like we’re at a really good place as far as it is an attractive option for defined contribution plan participants and sponsors.”
Anecdotally, he said some managers and investors left stable value due to the 2008 crisis. Yet, he’s now seeing billion-dollar 401k plans converting from money market into stable value, which he called “significant.”
Inflation anxiety
Inflation is an increasing concern, and the ability for stable value to keep pace is, therefore, a question.
“Crediting rates, as I said, are around 2%,” Luna countered. “I think it matters where inflation is going to end up. The good thing is that if rates rise, stable value does react; it just reacts over time. It’s not as acute, depending on the magnitude and the degree of the rate rise, but it trends over time. Certainly, with inflation being so low for 10 to 20 years, it has outpaced inflation, that’s for sure.”
He also argued that the federal reserve has proven it can manage or use tools to help control inflation.
“This lower for longer has benefited stable value. To your point, fixed income, in general, has a problem with high inflation rates. So it’s not a stable value. So when you look at it from that perspective, stable value looks really good.”
But Luna also noted some issues for sponsors and participants to be aware of—one is a recurring need for education about stable value’s purpose and function in the portfolio.
“There is no retail stable value product,” he said, “so that constant education and understanding of what it is supposed to do well, as a tool in your portfolio, and its purpose is why education is so important. You want to make sure your manager has excellent research. I think what’s been proven out from the 2008 financial crisis, and even last spring that, is that managers who have really good research can pick the right credit and not chase yields.”
A retirement income role
Stable value’s role in decumulation strategies and retirement income will also increase, and it’s used more and more in custom target-date portfolios.
“When accumulation was the problem to solve, target date filled that niche, Stable value wasn’t a part of it, which was probably appropriate. But on the decumulation side with retirement income, you need predictable returns that offer some kind of income. So that will be important going forward.”
And, of course, SECURE 2.0 and other recent retirement plan legislative proposals are something he and the T. Rowe team are closely watching.
“SECURE 2.0 is going to be beneficial for stable value,” Luna concluded. “In particular, it provides relief around the 403(b) plans, where they would be able to use commingled funds, including stable value. We think that’s a win; 403(b) plans have had some pretty onerous requirements. So, if they can relax those a bit and plan sponsors can leverage the knowledge they have from 401ks, which currently includes stable value, it will increase competition and drive down fees. So, we think it’s very beneficial.”