The fund stopped accepting new investors in January 2012 due to an industry-wide shortage of investment contracts, which the fund uses to help insulate investors from market volatility. Shortly thereafter, the fund began accepting new investors with $1 million or less in plan assets, and in December 2013 the fund allowed new investors with $10 million or less, although some larger investments were accepted on a case-by-case basis.
Associates of the San Francisco-based stable value division of Standish Mellon Asset Management Company LLC, a fixed income manager for BNY Mellon, manage the fund in their capacity as dual officers of The Bank of New York Mellon.
“We are pleased to see the amount of new stable value investment capacity that has been added to our industry over the past two years,” says Eric Baumhoff, chief investment officer of Standish’s stable value division. “The Bank of New York Mellon will continue to manage the Mellon Stable Value Fund in a prudent manner for plan participants, matching new investment demand with new product investment capacity.”
The fund’s goals are to preserve capital and earn current income. It invests primarily in book value wrap contracts that incorporate a broad selection of short- and medium-term fixed-income instruments, including U.S. government and agency bonds, corporate bonds, mortgages and asset-backed securities. The fund also may hold insurance company issued Guaranteed Investment Contracts (GICs) or similar instruments as well as cash equivalents.
During the 2008 credit crisis, many financial institutions were forced to increase their capital reserves to reflect deteriorating balance sheets; some financial institutions that issued wrap contracts (principal and accumulated interest guarantees)—a large number of them banks—exited the business. This made it difficult for stable value managers to secure the wrap capacity they needed, according to a white paper from Prudential Retirement (see “Stable Value Deserves Reconsideration”). In turn, a number of stable value managers exited the business too, forcing some plan sponsors to either remove stable value from their plans or find new providers.
Since then, after evaluating the risks, wrap prices have increased to be more consistent with stable value providers’ risk levels, and now more providers are back in the stable value business. One may think higher expenses would be a bad thing, but the white paper notes higher wrap fees are helping to attract new providers, extend wrap capacity, and ensure stable value’s book-value redemption guarantees remain available for current and future generations of retirement plan participants.