Products June 20, 2019

Investment Product and Service Launches

Morgan Stanley builds low-minimum impact portfolio suite; American Century Investments decreases ETF management fee; Sun Life Financial consolidates asset management businesses; and more.

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Art by Subin Yang

Morgan Stanley Builds Low-Minimum Impact Portfolio Suite

Morgan Stanley Wealth Management announced the launch of a new suite of Impact Portfolios with a $10,000 minimum on its Investing with Impact platform. These portfolios aim to provide investors with an accessible solution to help integrate impact objectives into an investment plan without sacrificing performance potential. The six Portfolios utilize a range of Investing with Impact objectives including restriction screening, environmental, social and governance integration, and thematic investing.

The Impact Portfolios leverage Wealth Management Investment Resources’ intellectual capital including asset allocation advice, portfolio construction resources, manager analysis, risk management and ongoing portfolio monitoring to provide clients with a diversified multi-asset class portfolio. The portfolios comprise mutual funds and exchange-traded funds (ETFs).

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“At Morgan Stanley we are committed to integrating environmental, social and governance (ESG) factors across our core businesses, and we use our platform as a global financial services provider to mobilize and scale capital in ways that deliver sustainable growth and long-term value,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management. “We’ve seen impact investing can deliver competitive market returns when investors choose to integrate positive environmental and social impact over the long term, and this new suite addresses heightened investor demand to align values with their portfolios.”

Through the companies that the Impact Portfolios invest in Morgan Stanley is trying to contribute to the development of solutions to the world’s most pressing environmental and social problems, such as those outlined by the United Nations Sustainable Development Goals (SDGs). In addition to SDG 14, the Impact Portfolios include alignment with several of the 17 SDGs including 6 (Clean Water and Sanitation), 7 (Affordable and Clean Energy), 8 (Decent Worth and Economic Growth), 10 (Reduced Inequalities) and 13 (Climate Action).

The Impact Portfolios are part of Morgan Stanley Wealth Management’s firm-discretionary program, which is led by Paul Ricciardelli, head of Wealth Advisory Solutions. The Impact Portfolios complement other higher minimum Investing with Impact firm-discretionary portfolios launched in 2015.

American Century Investments Decreases ETF Management Fee

American Century Investments has reduced its American Century Diversified Corporate Bond Exchange Traded Fund’s (KORP) management fee from 0.45% to 0.29%. The fee reduction for KORP was effective June 14.

“With KORP now exceeding $60 million and attracting steady flows, we decided to reduce the fees in order to provide better value to investors,” says Edward Rosenberg, senior vice president and head of ETFs for American Century Investments. “Our goal has always been to provide a lineup of ETFs that apply our unique insights to solve common investment problems.”

KORP is an actively managed corporate bond fund designed for investors seeking current income. The fund emphasizes investment-grade debt while dynamically allocating a portion of the portfolio to high yield in a single, systematically managed portfolio. By integrating fundamental and quantitative expertise, the portfolio management team strives for enhanced return potential versus traditional capitalization-weighted passive portfolios.

The fund is co-managed by Charles Tan, Jeffrey Houston, Le Tran and Gavin Fleischman. Senior Vice President and Global Fixed Income co-chief investment officer Tan joined American Century in 2018. Vice President and Senior Portfolio Manager Houston has been with the company since 1990. Vice Presidents and Portfolio Managers Tran and Fleischman joined the firm’s fixed income team in 2004 and 2008, respectively.

American Century offers a suite of ETFs that include American Century Quality Diversified International ETF (QINT), American Century STOXX U.S. Quality Growth ETF (QGRO), American Century STOXX® U.S. Quality Value ETF (VALQ) and American Century Diversified Municipal Bond ETF (TAXF). STOXX is a registered trademark of STOXX Ltd. All of the firm’s ETFs feature institutional-quality management that draws on the American Century’s fundamental and quantitative expertise.

Sun Life Financial Consolidates Asset Management Businesses

Sun Life Financial Inc. announced the establishment of SLC Management. SLC Management combines the organization’s affiliated fixed income institutional asset management businesses—Prime Advisors, Ryan Labs Asset Management and Sun Life Institutional Investments (U.S. and Canada)—as well as Sun Life’s general account, into a new autonomous asset management business. SLC Management also replaces the Sun Life Investment Management brand globally, effective immediately.  

“The launch of SLC Management builds on the organic growth that we’ve achieved since the establishment of our business and on the acquisitions of Ryan Labs, Prime Advisors and Bentall Kennedy,” says Steve Peacher, president, SLC Management. “This next step underlines our commitment to putting our clients at the heart of everything that we do. It enhances the strength, breadth, and seamless functioning of our investment strategies so that we can further achieve the investment objectives of our institutional clients.”

SLC Management will have two related, but distinct pillars—a fixed income pillar and a real estate pillar. The fixed income pillar will operate under the SLC Management brand name and will include the affiliates currently known as Prime Advisors, Ryan Labs Asset Management and Sun Life Institutional Investments (in both the U.S. and Canada). The real estate pillar will be comprised of the merged operations of SLC Management’s Bentall Kennedy business with GreenOak Real Estate (to be named “BentallGreenOak” upon close). 

Each of the portfolio management teams within SLC Management will retain investment autonomy while having access to a global credit analyst team of 40 experienced colleagues. This structure allows the teams to focus on driving investment performance for SLC Management’s clients, a structure the firm believes creates additional value for clients.

Adds Peacher, “Every change to our business is one that we feel will enhance our capabilities for our clients, who we share a common purpose with, which is to manage assets to meet long-term financial obligations. Sun Life has done this successfully for over 150 years and believe that we are uniquely placed to support them going forward. SLC Management supports and advances Sun Life’s vision of creating a global asset management firm that provides differentiated investment strategies to meet the evolving needs of investors.”

Empower Revamps Dynamic Retirement Manager Platform

Empower has designed a new variation of its Dynamic Retirement Manager (DRM) offering that integrates low-cost, index-based investments from State Street Global Advisors’, the asset management business of State Street Corporation.

In this offering, plan sponsors start with target-date funds (TDFs) from State Street. When the time is right for participants, their savings will transition into a customized managed account solution, managed by Advised Assets Group, LLC (AAG), a registered investment adviser, using the same underlying investments offered by State Street.

“We are on a mission to revolutionize the workplace retirement savings programs we offer our customers,” says Edmund F. Murphy III, president and CEO of Empower Retirement. “We recognize that developing value-aligned partnerships brings us to better outcomes for American workers who are saving for their retirement.”

With this solution, Empower says advisers no longer have to choose between target-date funds (TDFs) and managed accounts. DRM provides employees a glide path in the target-date series. Then, when the employees reach a certain age, they easily transition into a more personalized managed account based on their individual circumstances while still using the investment options that they already know and trust.

In April, Empower announced it had designed an offering within its DRM program that integrates the American Funds Target Date Retirement Series, which is an actively managed target-date series.

Compliance June 20, 2019

Process Protects Fiduciaries in Sequia Fund Performance Lawsuit

The ERISA fiduciary duty requires fiduciaries to act with prudence, not prescience, a court said.

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A new pro-defense decision has been entered by the U.S. District Court for the District of Nebraska in the matter of Muriv v. National Indemnity Company.

The lead plaintiff sued his former employer, National Indemnity Company, for allegedly breaching the fiduciary duties owed to him, and all others similarly situated, under the Employee Retirement Income Security Act (ERISA). National Indemnity moved for summary judgment on Muri’s claims, which the court has now granted.

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In both its claims and now its outcome, the Muriv lawsuit resembles other examples of litigation filed against retirement plan fiduciaries that made investments in the Sequoia Fund. Earlier this year, in fact, the 9th U.S. Circuit Court of Appeals ruled that, as a general matter, allegations based solely on publicly available information that a stock is or was excessively risky in light of its price do not alone plausibly state a claim for breach of the ERISA duty of prudence.

Background information in case documents shows the lead plaintiff was employed by National Indemnity, an insurance provider located in Omaha, Nebraska. During his employment, the plaintiff participated in National Indemnity Company’s Employee Retirement Savings Plan, which is a defined contribution plan.

According to case documents, the lead plaintiff elected to invest in the Sequoia Fund, described as “a non-diversified, long-term growth, mutual fund managed by Ruane, Cunniff & Goldfarb, Inc.” The Sequoia Fund invests in “common stocks it believes are undervalued at the time of purchase and have the potential for growth.” And it sells common stocks “when the company shows deteriorating fundamentals … or its value appears excessive relative to its expected future earnings.”

Despite having made and maintained the selection of the Sequoia Fund, the plaintiff alleged that the Sequoia Fund was, as of January 2015, no longer a prudent investment option. Additionally, the plaintiff contended the Sequoia Fund violated its own “value policy” by over-concentrating its investments in one, high risk stock, namely Valeant Pharmaceuticals. The plaintiff argued that Valeant’s stated acquisition strategy, along with its accounting practices, began raising red flags.

In October 2015, Valeant’s stock price fell dramatically, and by November 2015, Valeant had lost more than $65 billion in market value. This, in turn, caused the Sequoia Fund to lose approximately 25% of its value, diminishing the retirement account of the lead plaintiff and other plan participants who invested in the fund.

Formally, the lawsuit alleged National Indemnity violated the fiduciary duties it owed to plan participants by failing to prudently manage the plan by offering “shortsighted” investment options, such as the Sequoia Fund; and failing to avoid conflicts of interest in choosing its investment options, specifically those with close relationships to National Indemnity’s parent company, Berkshire Hathaway.” National Indemnity, for its part, motioned for summary judgment on both the duty of prudence and duty of loyalty claims.

The new ruling sides firmly with National Indemnity on these two issues.

First considering the duty of prudence claims, the court emphasizes that this duty “requires fiduciaries to act with prudence, not prescience, and thus, the relevant inquiry focuses on the information available to the fiduciary at the time of the relevant investment decision.”

“Relatedly, a plan fiduciary also has a continuing duty to monitor and evaluate the fund options in the plan and to remove imprudent ones,” the decision states, citing Tibble v. Edison. “That means the fiduciaries must ‘systematically consider all the investments of the plan at regular intervals to ensure that they are appropriate.’ But even if a fiduciary did not adequately engage in a review process before making a decision, that fiduciary is insulated from liability if a hypothetical prudent fiduciary would have made the same decision anyway.”

The decision states that, even viewing the facts of the case in the light most favorable to plaintiffs, no reasonable fact finder could determine that National Indemnity failed to meet its duty of prudence.

“Indeed, nothing in [the expert testimony] suggests that National Indemnity’s Plan committee was not thinking about, or consistently reviewing, the prudence of the Sequoia Fund,” the decision says. “Nor has plaintiff pointed the court to any authority suggesting that the failure to have an investment policy in place, standing alone, proves imprudence. … The record evidence demonstrates that the committee did not ignore the increased risk of maintaining the Sequoia Fund. Instead, as National Indemnity correctly points out, the committee monitored Sequoia and the plan’s other investments by meeting quarterly, reviewing performance evaluation reports from Wells Fargo, and relying on information in the financial press surrounding Valeant and the Sequoia Fund.”

The court goes on to explain that, while the plan committee allowed the Sequoia Fund to remain on the menu during the Valeant fiasco in 2015 and 2016, the committee repeatedly sent out advisories to plan participants that owned shares of the troubled fund. Such advisories noted that the committee had discussed various options with regard to Sequoia, one of which was whether to remove Sequoia as an investment option in the plan. The committee emphasized that there were alternative investment options in the plan available to participants that do not want to invest in Sequoia or who want to liquidate their investment in Sequoia. The committee further communicated that it did not want to force participants into liquidating, which would happen if the plan removed Sequoia as an investment option—and that it was up to participants to make their own choices in this matter.

Turning to the duty of loyalty claims, the court again sides firmly with the defense.

“The plaintiff contends that National Indemnity fell victim to conflicts of interest in choosing its investment options, especially those with close relationships to its parent company, Berkshire Hathaway—specifically, because the Sequoia Fund owned Berkshire Hathaway stock,” the decision states. “So, to support that claim, plaintiff must point to evidence from which a reasonable fact finder could infer that the subjective motivation behind the committee’s conduct placed Berkshire Hathaway’s interests over those of the plan participants. But here, there is no evidence in the record to support the conclusory allegation that the primary reason for National Indemnity’s retention of the Sequoia Fund in the plan is that the Sequoia Fund represented a vehicle for plan participants to invest in the stock of [National Indemnity’s] corporate parent, Berkshire Hathaway.”

Instead, the decision explains, the only evidence before the court is that the committee was skeptical of removing the Sequoia Fund from the plan because they did not want to “force participants into liquidating their investments” and wanted “to allow participants to decide based on their individual investment goals whether to continue their investment in the Sequoia Fund or to liquidate.”

“And to that end, plaintiff’s own expert found that committee members seem to have believed that the fund’s popularity among the participants was an important reason to defer any removal decision,” the decision concludes. “But it is not disloyal for an investment committee to consider what the Plan participants they represent might want. In fact, it simply bolsters the conclusion that the committee members were acting with the participants’ interests in mind.”

The full text of the summary dismissal decision is available here.

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