Video
Six steps to building resilient portfolios
Following the aftermath of the 2022 LDI crisis, responsible risk management is more important than ever.
Six steps to building resilient portfolios
As the LDI crisis unfolded last year, it highlighted the need for defined benefit (DB) schemes to consider risk in a more holistic manner as focussing on quantifiable risks is not enough.
Watch now to learn about our approach at SEI to responsible risk management and how we build resilient portfolios in our six-step strategy.
Six ways SEI builds resilient portfolios
Resilience is front of mind for trustees following the LDI crisis. Here are six ways SEI builds robust portfolios. First, by having the ability to adjust client asset allocations. As a fiduciary manager, our governance model allows us to adjust our client asset allocations. This was particularly important during the LDI crisis as it meant that we could act swiftly to adjust our client portfolios to accommodate LDI managers reducing leverage. This meant that we could increase the allocation to LDI assets by reducing the allocation to growth assets. This allowed us to more efficiently maintain hedging during a period of uncertainty.
Step two, assessing liquidity comprehensively. We regularly stress test our clients’ portfolios to ensure they have sufficient liquidity to meet their liability cash flows as they for due. We do this by applying stresses to interest rates, inflation, credit spreads, growth assets, and transfer values simultaneously, and ask whether the scheme still has sufficient liquidity to meet the next three years’ worth of cash flows where they are to become due immediately. During the LDI Guild market crisis our liquidity stress test framework served us well. None of our clients had to ask their sponsors for an emergency loan.
Step three, leveraging a unified investment platform across clients. Client assets are held on our global investment platform, allowing transparency and daily visibility down to the holding level. Having daily visibility during the crisis was really important at a time when we were trying to rebalance portfolios daily. You can't trade confidently if you don't know what your current position is. This meant that during the crisis, we were able to view our client holdings and communicate effectively.
Step four, adopting an open architecture approach. Our open architecture approach meant that during the crisis, we had a choice of third party LDI managers to use. We were able to reduce exposure to overly leveraged third party pooled LDI funds by first making use of funds invested in physical gilts. Second, by employing third party leveraged LDI funds, which were within our conservative limits on leverage. And lastly, by using SEI in-house LDI funds.
Step five, prioritizing no frills implementation. Our client portfolios are built using traditional building blocks, such as stocks and bonds. We do not rely on complex derivative based structures such as synthetic equity or credit to provide primary market exposure. Derivatives are used sparingly for risk management purposes, and leverage is used solely for the purpose of hedging out interest rate and risk. Put simply, we do not rely on overly financially engineered portfolios to meet our clients' investment objectives. This meant that throughout the crisis, our clients were not exposed to any collateral management issues associated with synthetic exposures. In addition, we had visibility of our clients' holdings, which helped facilitate efficient rebalancing of their portfolios.
Step six, ensuring diversification across a range of parameters. So being diversified is key to building resilient client portfolios. Portfolio diversification helps avoid exposures and concentration risk associated with holding any single security protecting portfolios. Further, as a result, being globally diversified across asset classes, sectors and currencies helped mitigate the impact of UK assets declining during the crisis. Furthermore, our active multi-manager approach brought valuable style and manager diversification benefits and helped unlock significant value for our clients over this volatile period.
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The portfolio allocation may include exposure to Irish Common Contractual Funds (“Irish CCFs”) which are authorised by the Central Bank of Ireland pursuant to the Investment Funds, Companies and Miscellaneous Provisions Act 2005 and the European Union (Alternative Investment Funds Managers) Regulations (as amended) (the “AIFM Regulations”). The Irish CCFs are managed by SEI Investments Global, Limited an Irish private limited liability company which is authorized by the CBI pursuant to the AIFM Regulations. The Irish CCFs are subject to the Central Bank of Ireland’s regulatory regime for alternative investment funds contained in the AIF Rulebook and qualify as qualifying investors scheme for the purpose of the AIF Rulebook. As such, the Irish CCFs may be marketed solely to Qualifying Investors. SEI Investments (Europe) Ltd acts as the distributor of the Irish CCFs.
The portfolio allocation may include exposure to non-EEA Alternative Investment Funds managed by SEI Investments Management Corporation (“SIMC”) which may not be subject to the AIFM Regulations or equivalent legislation or regulatory oversight in those particular jurisdictions.
SEI Alternative Investment Funds may be non-standardised and bespoke, and may invest in a variety of underlying assets such as shares in unregulated collective investment schemes which do not provide a level of investor protection equivalent to collective investment schemes, debt securities including collateralized loan instruments, asset backed securities and other forms of structured credit, property, commodities or fund-of funds mutual funds. Alternative Investment Funds by their nature involve a substantial degree of risk, including limited liquidity, lack of regulatory oversight, tax risks, investment risks, risks inherent to investments in highly volatile markets, risks related to international investment, risks pertaining to various investment techniques that may be employed by the fund, risks related to the ability to diversify investments, risks related to the accuracy of valuations of investments, and conflicts of interest and the risk of complete loss of capital and are only appropriate for parties who can bear that high degree of risk and the highly illiquid nature of an investment.
SEI Alternative Investment Funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. It should be noted that they may not be required to provide periodic pricing or valuation information to investors and may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as SEI’s range of UCITS or the Irish CCFs, and may often charge higher fees and offer limited liquidity.