The Markets July 22, 2009

Prudential Calls for Stable Value To Be Included as QDIAs

Testifying before the U.S. Department of Labor’s ERISA Advisory Council, James King, Jr., vice president and head of Prudential Retirement’s Stable Value Markets Group, urged that stable value products be classified as a qualified default investment alternative (QDIA) for employee retirement plans.

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Testifying before the U.S. Department of Labor’s ERISA Advisory Council, James King, Jr., vice president and head of Prudential Retirement’s Stable Value Markets Group, urged that stable value products be classified as a qualified default investment alternative (QDIA) for employee retirement plans.

King testified that stable value products minimize risk by investing in high quality securities and pointed out that in 2008, every stable value fund produced a positive return for the year. “The collapse of the financial markets highlights the need for investment options that both protect and grow principal,” King said in his testimony. “Participants must have an investment option that enables them to have retirement security.”

King also noted that stable value products are included in nearly half of 401(k)s or defined contribution retirement plans, according to the 13th Annual SVIA Stable Value Investment & Policy Survey. In addition, recent research by consultant Rocaton shows the funds have remained a popular choice for defined contribution plan participants (see “Participants Still Putting Money in Stable Value”).

King also testified to the following about stable value providers:

  • They are regulated by a number of government entities, such as the Securities and Exchange Commission and state insurance regulators, which are focused on ensuring stable value products are designed appropriately;
  • They must meet statutory requirements based on regulations to provide for the reserving of capital to meet obligations, distinguishing them from traditional investment products, which do not reserve capital to protect investors from losses; and
  • They align the interests of investors and asset managers because stable value providers have an incentive to invest conservatively with high quality, diversified portfolios.

King suggested there is a need for plan sponsors and investment consultants to access information to evaluate the benefits and risks of stable value products, especially given their unique combination of an insurance guarantee and a fixed income portfolio.

In recent testimony before the Department of Labor and Securities and Exchange Commission, some witnesses suggested stable value funds should be a part of target-date funds, which are QDIAs (see “Target-Dates Useful but Flawed, Witnesses Tell SEC and DoL”).

King’s ERISA Advisory Council testimony is available here.

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The Markets July 22, 2009

Investors Change ETF Investing Strategies

U.S. ETF asset flows were marked by a continued shift away from large cap and developed international equities during the first half of the year and into emerging markets and defensive assets classes that include commodities and investment grade corporate bonds.

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U.S. ETF asset flows were marked by a continued shift away from large cap and developed international equities during the first half of the year and into emerging markets and defensive assets classes that include commodities and investment grade corporate bonds.

This trend was reported in the “2009 ETF Mid-Year Review: Follow The Flows” from State Street Global Advisors.

Amid the turmoil of the last year, one constant has been the growth in inverse and leveraged products, according to the report. At the beginning of 2008, the inverse/leveraged category had just $11 billion in assets, but by the end of June 2009, that number had swelled to more than $32 billion alongside a 86% increase in the number of products. Moreover, in June, three of the top ten ETFs in terms of notional dollar volume were leveraged or inverse products, trading north of $1.5 billion per day.

Commodity products have accounted for 53% of the industry net flows YTD despite making up just 3% of listed ETFs. Moreover, the category’s 65% increase in assets is well beyond that of any other category, State Street noted.

The report pointed out that, as recently as the end of 2006, there were only six fixed income ETFs with $20.3 billion in assets, which at the time, represented just 4.8% of total industry assets. Today there are 63 products that command 13% of the ETF market. The increased acceptance and application of fixed income ETFs is a trend that is likely to continue, State Street said. Fixed income ETFs grew from nearly $60 billion in assets at the end of 2008 to over $70 billion by June 2009.

After what State Street called a horrific year in 2008 and a sluggish start to begin the New Year, emerging markets rallied to post gains of 16.5% and 19.9% in April and May, respectively. The flows into emerging market ETFs have mirrored this resurrection in performance.

Finally, the report noted that recent flows suggest that investors may be awakening to the prospect of inflation on the not so distant horizon. Net cash flows into domestic inflation-linked ETFs totaled $986 million in June 2009, more than double the monthly average for the prior 17 months.

A copy of the report can be downloaded from www.spdru.com. A free registration is required.

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