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
3Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
5Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
6Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
7Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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 (%
)
Callan Stable Value SA NCSRP ‐ Galliard Stable Value
8Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
Callan Stable Value SA NCSRP ‐ Galliard Stable Value
2014 2015 2016 2017 2018 201996
98
100
102
104
106
for 5 Years Ended March 31, 2019Market/Book Ratio
Market/Bo
ok Ratio
Callan Stable Value SA NCSRP ‐ Galliard Stable Value
9Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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)
10Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
11Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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% -
12Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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)
14Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
15Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
16Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
17Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
18Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
19Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
20Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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
21Knowledge. Experience. Integrity. North Carolina Supplemental Retirement Plans
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.