Franklin Templeton Adds Clearwater Stable Value Manager

Franklin Templeton has partnered with Clearwater Analytics to provide management and insights into stable value fund investments ahead of what many are predicting a near-term drop in interest rates.

The asset manager with $1.5 trillion under management will be using Clearwater Stable Value to help drive growth in its stable value fund business, the firms announced Tuesday. Clearwater’s system will provide the firm with investment technology, portfolio insights and stable value-specific support for Franklin Templeton employees to manage the “complex fund structures, securities and specialized accounting treatment.”

Stable value funds, a bond portfolio that is backed by insurance to protect against a decline in yield or loss of value, have underperformed other conservative investment options in the past couple of years as the Federal Reserve’s interest rate hikes made higher returns possible in investments such as money markets. But with a steady drop in inflation combined with a relatively strong employment market, many are predicting the Fed will start bringing down rates this year.

“Higher interest rates have certainly been a contributor to the negative flows within the Stable Value industry,” Pete Mahoney, enterprise account executive at Clearwater Analytics, said via email. “As significant rate increases occurred throughout 2022 and 2023, the competitive edge stable value had against alternative retirement investment options, most notably money market funds, diminished significantly.”

Mahoney attributed the outflows to other factors as well, including investors withdrawing funds to cover the higher cost of living, changes to retiree demographics and advisers moving clients into other products to compete against inflation.

“We do see consensus from the industry that over time, even with higher rates, stable value will be a competitive long-term investment option within the retirement space, and that outflows will subside,” Mahoney says.

According to the most recent data from the Stable Value Investment Association, there was about $882 billion invested in stable value as of the end of 2023.

As interest rates increased through the rate hiking, stable value funds further underperformed money market funds, notes Kyle Fekete, a senior vice president in Callan consultancy’s independent adviser group. However, he noted that “over most periods and over the long-term, stable value has outperformed money market funds.”

Callan notes that its tracking of taxable money market funds had near double the return of stable value funds for the year ending March 31, 2024. However, when considering a 10-year time horizon, its stable value fund peer groups each had more than double the return of its money market funds tracker.

As rates go up, he says, stable value should return to “outperforming money markets as these portfolios are invested further out in the yield curve”—with stable value bond maturities with an average 2-4 years maturity, and money market funds with an average of 60 days.

“As we see significant opportunity to continue to expand our stable value business, fortifying our investment technology for the future has become a top priority,” Steven A. Horner, a portfolio manager with Franklin Templeton, said in a statement.

Clearwater Stable Value will give Franklin Templeton managers insight into the market in part from Clearwater’s database with other partners, according to the announcement. Users will also have access to stable value management tools such as contract value accounting, crediting rate calculations and resets, 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 lifecycle ie: retirees,” Jonny Dittmer, general manager, Clearwater for Stable Value, Clearwater Analytics, said via email. “With rates set to decline, a resurgence in stable value funds is primed for the years ahead as crediting rates as well as market to book ratios will increase.”

In June, Broadridge’s Fi360 went live with a stable value and retirement income product evaluation tool with the goal of providing plan advisers and sponsors a due diligence process for evaluating and selecting the offerings. Its Retirement Product Evaluator runs off a proprietary database of retirement income-related and stable-value-fund products through partnership with CANNEX, an annuity data provider.