Franklin Templeton brings new Clearwater stable value manager on board

Franklin Templeton has partnered with Clearwater Analytics to provide management and insights into stable value fund investments ahead of what many predict will be a short-term decline in interest rates.

The $1.5 trillion asset manager will use Clearwater Stable Value to drive growth of its stable value fund business, the two companies said Tuesday. Clearwater’s system will provide the firm with investment technology, portfolio insights and stable value-specific support for Franklin Templeton staff to manage the “complex fund structures, securities and special accounting treatment.”

Stable value funds, a portfolio of bonds hedged against a decline in yield or loss of value by insurance, have underperformed other conservative investment options in recent years as Federal Reserve rate hikes have allowed for higher returns in investments such as money markets. But with a steady decline in inflation combined with a relatively strong labor market, many are predicting the Fed will begin cutting rates later this year.

“Higher interest rates have certainly contributed to the negative flows within the stable value industry,” said Pete Mahoney, enterprise account executive at Clearwater Analytics, via email. “As significant rate increases occurred throughout 2022 and 2023, the competitive advantage that stable value had over alternative retirement investment options, particularly money market funds, diminished significantly.”

Mahoney also attributed the outflows to other factors, including investors withdrawing funds to cover increased living costs, changes in the demographics of retirees and advisors switching their clients to other products to combat inflation.

“We see consensus in the industry that stable values ​​will be a competitive long-term investment option in retirement savings over time, even with higher interest rates, and that outflows will subside,” Mahoney says.

According to the latest data from the Stable Value Investment Association, about $882 billion was invested in stable assets at the end of 2023.

When interest rates rose with rate hikes, stable value funds underperformed money market funds, notes Kyle Fekete, senior vice president of Callan Consultancy’s independent advisory group. He noted, however, that “over most time periods and over the long term, stable value funds have outperformed money market funds.”

Callan points out that the taxable money market funds he tracks returned almost twice as much as the stable value funds in the year ending March 31, 2024. However, looking at a 10-year time horizon, the comparable stable value funds each returned more than twice the money market fund tracker.

As interest rates rise, he says, stable bonds should again “outperform money markets because these portfolios are invested further out on the yield curve” – ​​with stable bonds having an average maturity of two to four years and money market funds averaging 60 days.

“As we see significant opportunities to further grow our stable asset business, strengthening our investment technology has become a top priority for the future,” said Steven A. Horner, portfolio manager at Franklin Templeton, in a statement.

Clearwater Stable Value will provide Franklin Templeton managers with market insights based in part on Clearwater’s and other partners’ database, the announcement said. Users will also have access to tools for managing stable values, such as contract value accounting, credit interest calculation and repricing, and contract trading.

“Stable Value Funds are a valuable asset Class for investors who are more focused on capital preservation than maximizing returns at the stage of their individual investment life cycle, i.e. retirees,” said Jonny Dittmer, Clearwater’s general manager of stable value at Clearwater Analytics, via email. “With interest rates set to decline, a resurgence in stable value funds is in order for the coming years as credit rates as well as market-to-book ratios will rise.”

In June, Broadridge’s Fi360 went live with a stable value and retirement product evaluation tool, with the goal of providing plan advisors and sponsors with a due diligence process for evaluating and selecting offerings. Its Retirement Product Evaluator uses a proprietary database of retirement and stable value fund products in partnership with CANNEX, a retirement data provider.