Knowledge Centre Archive
A Cutting Edge Solution for Active Global Investors
Global diversification makes sense for many investors, but managing a global portfolio presents challenges. As a leader in manager-of-manager investing, SEI brings considerable resources and expertise to this endeavour. Our Global Equity Fund is designed to pursue attractive risk-adjusted returns in an efficient, cutting-edge manner.
Managing a global investment portfolio is no easy task. It takes considerable resources just to analyse and monitor the many, many thousands of publicly traded securities in the world, much less build and manage a well-designed portfolio of them. Fortunately, SEI has the scale, resources and expertise needed to design and manage global portfolios for clients. One of those strategies, our SGMF Global Equity Fund* (the Fund), is designed to help meet the needs of investors who seek capital appreciation through investment in global developed-market equities. The strategy takes advantage of SEIís global reach, as well as the breadth and depth of SEIís human capital, by integrating insights across regions and investment approaches.
The Challenges of Managing a Global Portfolio
†An investor who wants to pursue an active global investment strategy faces several hurdles. First, expected sources of active performance must be identified, defined and measured. Next, the investor must choose between employing external managers or competing for the personnel and financial resources necessary to manage a strategy directly. Whichever approach is chosen, investors must also be cognizant of the sheer breadth of (and numerous complexities at work in) global financial markets.
Investors who choose the external-manager approach must develop a reliable and repeatable process capable of identifying and monitoring skilled managers. They must have sufficient expertise in portfolio construction to hire the right managers, in the right proportions, at the right times. To make sound regional allocation decisions, it helps to have diverse and experienced professionals located around the world. Finally, long-term success requires a sound risk-management framework. (The use of overlay techniques can be helpful in this regard.)
Clearly, this is not a proposition that can be taken lightly; fortunately, SEI has the resources and geographic reach necessary to manage well-designed global investment portfolios for our clients. We aSEIlso have a proven history of innovation and a culture that fosters ongoing advances in the solutions we bring to the table.
A History of Innovation, a Wealth of Resources†
For several decades, SEI has been a thought leader in the investment-management industry, and this leadership is not limited to our pioneering work in the manager-of-managers space. For example, in 1991, SEIís Gil Beebower co-authored a landmark paper that has helped shape the industryís approach to asset allocation ever since. In the intervening years, SEI has entered many international markets and implemented cutting-edge concepts such as goals-based investing, fiduciary management, and low-volatility equity strategies. SEIís core fund offerings integrate our manager-specific knowledge with active, forward-looking alpha-source positioning.
Our innovative spirit is sustained by ongoing investments in our internal capabilities. SEIís Investment Management Unit now employs over 100 professionals across four continents. These individuals have an average of 14 years of industry experience, and more than half of them hold advanced academic degrees or professional designations. Most of our individual teams specialise in particular asset classes and regions, others focus on portfolio design and construction or risk management, and many of them are responsible for manager due diligence and monitoring ó an area where SEI has long played an industry-leading role.
The FoundationóSEIís Alpha Source Framework
†Like most of our active-investment offerings, the Fundís strategy starts with our alpha-source framework. We believe certain human behavioural biases, as well as various structural impediments within markets, impact security prices in ways that make it possible for a skilled active investor to outperform over time. Without delving into the underlying behavioural aspects, we have identified five primary sources of excess return in equity markets ó selection, macro, risk premium, momentum and stability.
Selection refers to specific, idiosyncratic opportunities where an investor possesses superior insight into individual investment opportunities (specific companies and stocks) or themes (country, sector or industry, for example). Macro refers to the tendency of riskier asset classes to outperform less risky ones; this results from investorsí aversion to the volatility associated with changes in economic variables or trends. Risk premium refers to the tendency of financial markets to misprice risk, such as the liquidity and operational risks associated with smaller companies, or the return demanded by investors from out-of-favour, undervalued stocks. Momentum refers to the observed persistence of price or fundamental trends over the short-to-intermediate term, due to an initial period of under-reaction to positive news. Momentum reflects a gradual change in perception, as investors remain anchored to their initial views, despite the arrival of more contemporaneous data. It can also arise from structural factors, such as sparse analyst coverage and lack of investor interest. Stability refers to the observed tendency of markets to misprice the volatility of security values and issuer fundamentals. A managerís philosophy and investment process determine which alpha sources they are most likely to exploit effectively.
Importantly, the effectiveness of the last three alpha sources varies over time (cyclically and, less commonly, structurally) and space (as a result of idiosyncrasies observed in national or regional markets, for example). In our experience, in order to succeed, an active investor cannot just statically allocate to a given set of alpha sources without regard to market cycles and regional variations. For that reason, we carefully monitor the investment cycle and analyse how each alpha source responds to it, including country-specific effects.
The Thinking Behind the StrategyóGlobal Equity
The approach employed in the Fundís strategy leverages the thinking of SEIís deep and talented investment staff across numerous asset classes and geographies, as well as a diverse array of external managers. From formal and informal discussions and our own research, we seek to identify the most compelling opportunities in global markets at any given point in time.
As we identify compelling themes and attractive opportunities, we are able to take advantage of SEIís deep institutional knowledge in the areas of manager analysis, selection, sizing and monitoring. We hire managers who we believe are best-suited to each opportunity we identify, and proactively manage those risks that we believe global investors should avoid.
In addition to our alpha-sources framework, three core beliefs guide our investment process:
Active management can add value, but the average manager will not. For this reason, it is imperative to identify superior investment managers and gain a deep understanding of each oneís competitive edge in the market.
No single manager can deliver in all markets. A manager of managers must understand the potential sources of outperformance and how they vary, both regionally and with market cycles. By doing so, we have a better basis for identifying those managers who are best positioned to exploit a given opportunity set.
Outperformance can be achieved by manager selection and sizing, both strategic and tactical. Our reliable and repeatable manager-evaluation process keeps us positioned to select the right managers for the long term, while our continuous monitoring of potential excess-return opportunities and portfolio-level dynamics allows us to respond to short- and intermediate-term market movements.
The Fund is tailored to the structures of different markets. For example, a particular alpha source may be more compelling in one country than another for cultural, economic, institutional or other reasons. The strategy also evolves with market cycles, as a given alpha source may be more compelling in up or down markets, or when economic sentiment is moving in a particular direction. It is designed to be adaptive to developments in particular alpha sources, based on continued empirical research, in order to minimise the effect of hindsight and similar biases. And it is forward looking, as we continuously assess the relative attractiveness (and unattractiveness) of alpha sources in the global marketplace.
Our cyclical-risk-premium analysis employs a three-factor framework consisting of valuation-spread measures, marginal economic performance, and indicators of current investor sentiment. The risk premium alpha source is most attractive to us when the disparity between richly priced and cheaply priced stocks is wide, when business indicators like purchasing managersí indices (PMI) are showing economic improvement, and when value stocks are attracting investor interest.
Given the Fundís focus, we will tend to have a preference for smaller, more nimble specialist managers over large, global generalists (although we wonít hesitate to use the latter when appropriate). While generalists typically cover securities across many countries, specialist managers tend to offer greater depth within certain countries, regions or other areas of the market. When we identify an opportunity and a skilled manager who we believe can exploit it, we want that manager to apply its insights across as many individual bets as its expertise and resources allow. For example, if we believe risk premium is a compelling alpha source in a particular country, we are likely to hire a manager who specialises in that country and whose process exploits risk-premium opportunities.
Of course, risk management plays a critical role in the Fund, and this is another area where SEIís expertise is vital. In addition to identifying attractive opportunities for alpha generation, we seek to avoid or minimise those risks for which we believe an investor will not be adequately compensated. We then carefully manage currency and broad market exposures that our selected managersí pursuit of opportunities gives rise to. As a manager of managers, SEI is a pioneer in the use of portfolio-level overlay management, and those techniques are a crucial part of the investment process utilised in the Fund. They make it possible for us to employ our highest-conviction managers while independently managing the Fundís tracking error.
Finally, to be successful over the long term, an active strategy should have a logical and effective sell discipline. We will shut down a particular manager or investment theme if there is a break in our supporting thesis, if more compelling alternatives are identified, or if we expect it to encounter future headwinds. We keep tabs on these possibilities through continuous monitoring of the portfolioís holdings and ongoing supervision of its managers.
The Strategy in Action
†The result is a cutting-edge solution for active global investors. The Fund pursues capital growth while attempting to avoid the risk of single managers and investment styles. It distils SEIís current investment ideas across multiple managers and approaches while dynamically pursuing a number of different alpha sources and managing portfolio-level risk.
The ultimate objective is to provide investors with attractive outperformance as consistently as possible. It is supported by SEIís global equity and fixed-income teams, along with continuous market and manager research and monitoring. When manager changes are made, they are designed to be implemented seamlessly and cost effectively, thanks to SEIís overlay capabilities. Over time, we expect this approach to produce attractive risk-adjusted returns.
A Compelling Proposition for Active Global Investors
In short, we believe SEIís Global Equity Fund is a compelling alternative for investors considering an active allocation to global equity markets. It benefits from SEIís active-manager heritage, reflects our history of innovation, and is supported by a team of global professionals who excel at manager selection, portfolio construction and fund-level risk management.
Glossary of Financial Terms
- Active management: Active managers aim to outperform a specific index, or benchmark. An active manager will continuously monitor and make changes to investments in an attempt to maximise returns.
- Alpha: Alpha refers to returns in excess of the benchmark.
- Alpha source: Alpha source is a term used by SEI as part of our internal classification system to categorise and evaluate investment managers in order to build diversified fund portfolios. An alpha source is the investment approach taken by an active investment manager in an effort to generate excess returns. Another way to define an alpha source is that it is the inefficiency that an active investment manager seeks to exploit in order to add value.
- Cyclical: Cyclical sectors or stocks are those whose performance is closely tied to the economic environment and business cycle. Managers with a pro-cyclical market view tend to favour stocks that are more sensitive to movements in the broad market and therefore tend to have more volatile performance.
- Fundamentals: Fundamentals refers to data that can be used to assess a country or company's financial health such as amount of debt, level of profitability, cash-flow, inventory size etc.
- Strategic: Strategic refers to longer-term asset allocation decisions or positions that aim to take advantage of future market opportunities.
- Tactical: Tactical refers to short term asset allocation changes or positions that aim to take advantage of near-term market opportunities.
- Valuation spread: Valuation spread refers to price differences between inexpensive and expensive securities.
- Equities are subject to material market risk. Their values tend to be volatile and can decline quickly or over extended periods of time.
- Fund assets in currencies other than the base currency of the Fund may expose the Fund to loss if the currency of those assets falls in value relative to the base currency.
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