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Friday, January 09, 2009

Who Failed the Lehman Stable Value Fund?

Reported by Neil Anderson, Managing Editor

The Reserve Primary Fund wasn't the only supposedly safe option to feel the pain after Lehman Brothers went bankrupt in September. The Wall Street Journal's Diya Gullapalli use the Friday Fund Track column to report on the woes of Lehman 401(k) participants who invested in the Invesco stable value fund and lost 170 bps in December. The fund gained just 200 bps net for the year.

The report follows up on an earlier story by Bloomberg's Sree Vidya Bhaktavatsalam, who reported on the Lehman stable value fallout last week (see our sister publication: The 401kWire, 12/31/2008).

Compared to the market's overall pain (a 39 percent decline for the S&P 500 index in 2008) and that of both stock mutual funds and other fixed income investments, a 1.7 percent loss for one month may not seem that bad, but it's practically unheard of in the stable value world, where the funds are touted as diversified (both in terms of assets and insurers), guaranteed, conservative investments that have better returns than money market funds. The last time stable value funds reported losses was 15 years ago in the wake of defaults by Executive Life and Mutual Benefit Life.

Those earlier losses spurred both a name change in the industry -- the funds had been known as "guaranteed investment contracts" before taking the "stable value" brand -- and a change in the product design as asset managers added multiple "wraps" to protect the value of the pools.

Bloomberg had claimed that Lehman's bankruptcy invalidated the insurance "wraps" on its participants stable value accounts, thus exposing participants to a bond price drop in December, and the WSJ specifically points the finger at two wrappers, JPMorgan and Pacific Life. (Bank of America told the WSJ that it still wrapped the accounts, while Natixis and State Street didn't respond one way or the other.)

Yet since the problem stems from Lehman's and not the fund itself, Invesco spokesman Bill Hensel stressed to the Journal that the loss only affects participants in the Lehman 401(k), not other participants in other plans utilizing even the same Invesco offering. 

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