elizabeth hood, cfa - files.nc.gov · market-to-book ratio 98.6 - callan stable value ct....

Stable Value Fund ReviewNorth Carolina Supplemental Retirement Plans

June 20, 2019

Kyle Fekete, CFAGlobal Manager Research Group

Elizabeth Hood, CFAAtlanta Fund Sponsor Consulting

Weston Lewis, CFA, CAIAAtlanta Fund Sponsor Consulting

1Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans

Contents

Executive Summary

Galliard Stable ValueOrganizationPeopleProcessPerformanceFees

Stable Value Trends

Executive Summary


Stable Value Review – Executive Summary

Callan performed an extensive onsite meeting with Galliard on March 2, 2019

Callan maintains a positive opinion of Galliard’s stable value strategy and the internally managed fixed income that underlies stable value accounts

Galliard is undergoing some organizational changes that warrant a close watch

Aside from the recently announced upcoming retirements, the fixed income and stable value teams have experienced a low degree of turnover since firm’s inception

A collaborative and structured process has aided in developing wrap contract solutions and maintaining a consistent investment approach

North Carolina’s stable value fund has performed in line with expectations and has consistently generated a crediting rate in line with peers

Galliard Stable Value


Galliard Stable Value – Organization

Galliard announced several upcoming retirements at the senior level of the firm as well as operational changes– Richard Merriam, Founding Managing Partner and Member of the Executive Operating Committee, will retire December

31, 2019– Karl Tourville, Founding Managing Partner, President and Chairman of the Executive Operating Committee will retire June

2020

Andrew Owen, President of Wells Fargo Funds, will assume the role of President and Member of the Executive Operating Committee on January 1, 2020

On December 31, 2019, Galliard’s current revenue sharing agreement with Wells Fargo will end; the structure of the new revenue sharing agreement has not yet been finalized

On January 1, 2020, Galliard’s risk management, compliance and technology teams will begin reporting to Wells Fargo’s risk and technology groups

Callan maintains a cautionary status with respect to the organization

Callan would provide a more positive opinion should Galliard prove that it can minimize any future senior level departures and maintain stability at the firm

While Wells Fargo may attempt to eliminate redundancies over time, any sweeping and immediate job cuts would be viewed negatively


Galliard Stable Value – People

Fixed income and dedicated stable value teams have experienced low turnover since firm’s inception

Ajay Mirza and Brandon Kanz remain key investment professionals acting as Chair and Vice-Chair of Investment Committee

Leela Scattum, Partner and Chief Stable Value Strategist, announced her intention to retire December 31, 2020; Nick Gage will assume Scattum’s role

Deep stable value team comprised of nine wrap contract negotiating professionals, four external management oversight professionals, six contract administration professionals and 10 stable value accounting and operations professionals


Galliard Stable Value – Process

Galliard conducts a collaborative and structured process in implementing stable value portfolios

Dedicated resources and experience in wrap contract management as well as asset size have been competitive advantages for the firm in negotiating wrap agreements

External management oversight, led by Elizabeth Smithley and Peter Schmit, appears to be thorough and robust

While Galliard’s fixed income characteristics are conservative and risk aware relative to peers, they diversify their investment approach with subadvisors that source alpha opportunities with bottom-up security selection within corporate credit and duration management

2014 2015 2016 2017 2018 20191.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

for 5 Years Ended March 31, 2019Effective Duration

Effective Du

ratio

n

Callan Stable Value SA NCSRP ‐ Galliard Stable Value

2014 2015 2016 2017 2018 2019(2.5)

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

for 5 Years Ended March 31, 2019BBB Exposure

BBB (%

)



Galliard Stable Value – Performance

The NCSRP stable value fund has produced a crediting rate above the peer median

Market to book value ratios started declining in 2016 as the Federal Reserve began raising interest rates, falling below 100% in 2018

Market to book began increasing in December 2018 as the markets experienced a flight to quality and the Fed announced a pause to rate hikes

2014 2015 2016 2017 2018 20191.0

1.5

2.0

2.5

3.0

3.5

for 5 Years Ended March 31, 2019Crediting Rate

Crediting

Rate


2014 2015 2016 2017 2018 201996

98

100

102

104

106

for 5 Years Ended March 31, 2019Market/Book Ratio

Market/Bo

ok Ratio



Galliard Stable Value – Performance

Last Quarter Last Year Last 3 Years Last 5 Years Last 7 Years0.0

0.5

1.0

1.5

2.0

2.5

3.0

Group: Callan Stable Value SAfor Periods Ended March 31, 2019Returns

10th Percentile 0.67 2.56 2.28 2.27 2.3625th Percentile 0.66 2.50 2.27 2.18 2.18

Median 0.64 2.45 2.15 2.08 2.1475th Percentile 0.60 2.29 1.97 1.81 1.7690th Percentile 0.51 1.91 1.62 1.53 1.58

NCSRP ‐ Galliard Stable Value A 0.64 2.53 2.30 2.22 2.33

A (47)

A (15)

A (1)A (20)

A (18)

2018 2017 2016 2015 2014 2013 2012 20110.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Group: Callan Stable Value SAfor Periods Ended December 31, 2019Calendar Year Returns

10th Percentile 2.86 2.61 2.50 2.52 2.60 2.77 3.26 3.7725th Percentile 2.40 2.19 2.13 2.20 2.18 2.48 2.82 3.43

Median 2.34 2.07 1.96 1.98 1.94 2.11 2.59 3.1075th Percentile 2.13 1.85 1.75 1.68 1.56 1.69 2.25 2.3990th Percentile 0.85 1.61 1.57 1.51 1.37 1.39 1.84 2.11

NCSRP ‐ Galliard Stable Value A 2.45 2.18 2.13 2.13 2.06 2.42 3.05 3.58

A (20)

A (27) A (25) A (30) A (31)

A (30)

A (13)

A (17)

0.06 0.08 0.10 0.12 0.14 0.161.2

1.4

1.6

1.8

2.0

2.2

2.4

for 5 Years Ended March 31, 2019Scatter Chart

Standard Deviation

Returns

Callan Stable Value SA

NCSRP ‐ Galliard Stable Value

Yield on Underlying Assets Number of Wrap Providers100

90

80

70

60

50

40

30

20

10

0

Group: Callan Stable Value SAPortfolio Characteristics For Periods Ended March 31, 2019

25th Percentile 3.52 9.00Median 2.90 7.00

75th Percentile 2.68 5.0090th Percentile 2.55 2.60

NCSRP ‐ Galliard Stable Value A 2.84 5.00

A (57)

A (83)


Galliard Stable Value – PerformanceDiversification by Wrap Issuers and Subadvisors as of March 31, 2019

Liquidity Buffer

2%

American General

20%

Nationwide Life18%

Metropolitan Life11%

Prudential 25%

Transamerica24%

Wrap Issuer Exposure

BlackRock STIF2%

Galliard47%

Dodge & Cox11%

Jennison10%

Payden & Rygel10%

PGIM 10%

TCW10%

Subadvisor Exposure


Galliard Stable Value – PerformanceSubadvisor performance for periods ended March 31, 2019

1Payden Linked BM: Bloomberg Barclays U.S. Intermediate Aggregate Bond Index. Prior to June 1, 2018 benchmark was Bloomberg Barclays U.S. 1-3 Year Government/Credit Bond Index. Performance inception: June 1, 2018. Prior to June 1, 2018 returns are linked to Wells Fargo Fixed Income Fund N (Jennison).

Manager 1 month 1-quarter 1-years 3-years 5-yearsSince

Inception Inception Date

Galliard 0.71% 1.52% - - - 3.19% June 1, 2018

BB 1-3 yr Gov’t/Credit Index 0.66% 1.21% - - - 2.75% -

Galliard 1.46% 2.58% - - - 4.52% June 1, 2018

Dodge & Cox 1.47% 2.93% 4.47% 2.36% - 2.27% Mar 1, 2015

Prudential 1.36% 2.51% 4.62% 2.23% - 2.58% Feb 1, 2016

BB Intermediate Aggregate Index 1.39 2.28% 4.33% 1.71% 1.95% 4.21% / 1.91%

/ 1.95% -

Payden & Rygel 1.34% 2.35% 4.49% 2.11% 1.70% 2.13% July 1, 2009

1Linked Benchmark 1.39% 2.28% 4.49% 1.79% 1.51% 1.63% -

Jennison 1.32% 2.20% 4.29% 1.95% 2.46% 4.81% 1See Note

TCW 1.39% 2.41% - - - 4.69% June 1, 2018

BB IntermediateGov’t/Credit Index 1.35% 2.32% 4.24% 1.66% 2.12% 4.79% / 4.17% -


Galliard Stable Value - Fees

• Galliard has been assertive in negotiating wrap contract fees.

• NC’s management fee is competitive among stable value reported management fee schedules.

Wrap/Subadvisor and Management Fee Comparison

Wrap Fees Sub‐Advisor Fees100

90

80

70

60

50

40

30

20

10

0

Group: Callan Stable Value SAEnded March 31, 2019Fee Comparison

25th Percentile 0.19 0.09Median 0.18 0.06

75th Percentile 0.18 0.0090th Percentile 0.18 0.00

NCSRP ‐ Galliard Stable Value A 0.17 0.06

A (96)

A (51)

Effective Annual Fee100

90

80

70

60

50

40

30

20

10

0

Group: Callan Stable Value SAEnded March 31, 2019Management Fee Comparison

25th Percentile 0.13Median 0.10

75th Percentile 0.0990th Percentile 0.05

NCSRP ‐ Galliard Stable Value A 0.07

A (87)

Stable Value Trends


Factors Impacting Stable Value Environment

Post-2008 Credit Crisis and Wrap CapacityInvestment guidelines tightened after the financial crisis, limiting interest rate risk and investable securities.

More recently, wrap fees have declined to 17-19 bps from the 25-30 bps range immediately after the GFC.

Investment guideline negotiating leverage has shifted back in favor of investment managers.

Current Rate EnvironmentGradual interest rate increases have decreased market-to-book values and helped raise crediting rates.

Money market funds may out-yield stable value with a sharp rate increase; however, such periods have historically been short.

Stable Vaue Funds remain a popular capital preservation option

74% of DC Plans offer the option


Market-to-Book Ratios Have Fallen

Market-to-book value ratio is a measure of the overall health of a stable value fund.

●Market-to-book may dip below par (100) during a rising rate environment.

●Gradual increases in interest rates are manageable.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 201887.5

90.0

92.5

95.0

97.5

100.0

102.5

105.0

107.5

Mar

ket-t

o-B

ook

Rat

io

98.6 - Callan Stable Value CT


Crediting Rates are at Historic Lows

Post-GFC, crediting rates were impacted by strict investment guidelines and declining rates.

●However, rising interest rates and increased allocations to spread product have helped increase crediting rates.

● Investment managers have negotiated looser guidelines.

2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

1

2

3

4

5

6

Cre

ditin

g R

ate

2.3 - Callan Stable Value CT


Impact of Wrap Contracts on Return Consistency

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18-1

0

1

2

3

4

5

6

7

8

Rolling 1 Year Returns for 20 Years ended December 31, 2018

3 Month T-BillCallan Stable Value CT

Callan Stable Value SA

Wrap contracts provide greater return consistency versus money market funds

Money market funds have outperformed in periods when rates rise quickly


Impact of Wrap Contracts on Return Consistency

9899 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18-2

0

2

4

6

8

10

12

14

Rolling 1 Year Returns for 20 Years ended September 30, 2018

BB Gov/Cr 1-5 Yr

Callan Stable Value CTCallan Stable Value SA

Gov/Credit 1-5 YearBloomberg Barclays

Less return volatility versus a fixed income benchmark with a similar duration

Crediting rate will lag changes from volatile fixed income markets


Stable Value Fund Popularity

Stable value funds are popular with DC plans, with 74% offering the option.

Stable value funds are popular with participants, with 12% of assets being allocated when offered.

Over $700 billion was invested in stable value strategies as of December 31, 2017.

Source: Callan’s DC Index, Stable Value Investment Association

0%

10%

20%

30%

40%

50%

60%

70%

80%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

11.7%

73.5%

Average Allocation

Prevalence

Prevalence of Stable Value as of September 30, 2018


Stable Value as Qualified Default Investment Alternative

Source: Callan 2018 Defined Contribution Trends Survey

Current default investment alternative for non-participant directed monies

A key provision of the Pension Protection Act provides relief to DC fiduciaries that default participant assets into QDIAs under regulation 404(c)(5).

Target date and managed account options have slowly replaced stable value as a QDIA.

86.2%

1.1%2.3%6.9%2.3%1.1%

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018

Other

Managed account

Target risk

Balanced fund

Stable value or money market

Target date retirement


Disclaimers

This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any decision you make on the basis of this content is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation.

This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact.

Reference to or inclusion in this report of any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan.

Past performance is no guarantee of future results.

The statements made herein may include forward-looking statements regarding future results. The forward-looking statements herein: (i) are best estimations consistent with the information available as of the date hereof and (ii) involve known and unknown risks and uncertainties such that actual results may differ materially from these statements. There is no obligation to update or alter any forward-looking statement, whether as a result of new information, future events or otherwise. Undue reliance should not be placed on forward-looking statements.

elizabeth hood, cfa - files.nc.gov · market-to-book ratio 98.6 - callan stable value ct....

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