Since SEI first began in-house management of SEI’s SGMF Dynamic Asset Allocation (DAA or the Fund) Fund for institutional clients in 2012, it has delivered strong absolute and risk-adjusted returns.1 While the Fund has maintained a passive strategic exposure to equities, its tactical trades have been diverse and varied over time. From developed-market currency trades to a position in U.S. Consumer Price Index (CPI) swaps, the DAA Fund has demonstrated the ability to capitalise on mispricings regardless of market or asset class. This flexibility has allowed DAA to add value in environments that may be challenging to more traditional forms of active management.

The Original Concept

Although DAA changed it’s beta from the FTSE 100 Index to the MSCI World Index on 15 March 2018, the concept of the Fund still holds as does the discussion of tactical trades. The DAA Fund seeks to implement SEI’s “house views” on the global capital markets—without altering an investor’s long-term strategic allocation. To do this, the Fund consists of two portions: beta, a basket of MSCI World Index stocks intended to be representative of the global stock market; and alpha, represented by various active, relative value positions (typically through derivatives). This is illustrated in Exhibit 1.

Because the Fund uses the MSCI World Index as its source of beta exposure, investors can simply substitute a portion of their global equity exposure with the Dynamic Asset Allocation Fund. As a result, their strategic asset allocation to global equities is maintained while also providing exposure to SEI’s house views. Exhibit 2 illustrates how the DAA Fund can be seamlessly integrated into a traditional asset allocation model.

We designed the DAA Fund to seek meaningful exposures to high-conviction opportunities. Unlike typical global tactical asset allocation (GTAA) funds (which trade frequently, often with short time horizons), we enter a limited number of active trades at a time (typically four to eight) and only consider those that we believe offer a compelling potential payoff. Our typical time horizon for a trade is between 12 to 24 months, whereas GTAA funds may have a daily time horizon. Exhibit 3 summarizes the differences between the DAA fund and typical GTAA funds.

DAA also seeks to provide a diversifying source of alpha or active return. By sourcing our valueadd from various markets such as regional equity, credit, currency and volatility (options), to name a few, we aim to offer a different source of alpha than traditional sources (such as security selection and sector allocation).

The Process

The DAA Fund is managed by a committee of subject-matter experts from different areas of SEI’s Investment Management Unit. Members of the committee leverage not only their personal viewpoints, but also the collective insights of underlying managers within SEI’s funds. In taking these aggregate views, they formulate robust assessments of market expectations and valuations that ultimately inform their trade ideas.

The committee meets at least weekly to discuss current positioning and new trade ideas. New trade ideas are subject to rigorous debate and are often vetted over the course of several meetings. This process evaluates an idea on its own merits and in consideration of how it would fit in the overall portfolio. After a trade idea is determined to be appropriate, practical considerations are addressed (such as sizing and implementation vehicle). The committee continuously monitors the trade once it’s established in the Fund to ensure the thesis remains intact.

The DAA Fund is managed by a committee of subject-matter experts from different areas of SEI’s Investment Management Unit. Members of the committee leverage not only their personal viewpoints, but also the collective insights of underlying managers within SEI’s funds. In taking these aggregate views, they formulate robust assessments of market expectations and valuations that ultimately inform their trade ideas.

The committee meets at least weekly to discuss current positioning and new trade ideas. New trade ideas are subject to rigorous debate and are often vetted over the course of several meetings. This process evaluates an idea on its own merits and in consideration of how it would fit in the overall portfolio. After a trade idea is determined to be appropriate, practical considerations are addressed (such as sizing and implementation vehicle). The committee continuously monitors the trade once it’s established in the Fund to ensure the thesis remains intact.

The Results

The DAA Fund has performed well in absolute terms and on a risk-adjusted basis since SEI began implementing its tactical views. It has also met other important objectives, in terms of breadth of market views, diversification and risk management.

Varied Source of Ideas

Since inception in December 2010, the DAA Fund has been diverse in its sources of active opportunities. It has used currencies (both developed and emerging), volatility (through options), regional equities, and inflation markets. Exhibit 4 illustrates the Fund’s various sources of excess return since SEI began managing the active portion of the Fund. We believe that diversification across asset classes, regions and time provides a more robust portfolio and gives us greater breadth to pursue the Fund’s performance
objectives without being overly reliant on a single return source.

Diversification of Active Returns

Over the past five years, the DAA Fund’s excess returns have exhibited relatively little correlation with the excess returns of other SEI Funds. This low (or, in some cases, slightly negative) correlation shows the potential diversification benefits of adding DAA to a portfolio; many of SEI’s other Funds have traditional alpha sources (such as stock selection in equities and credit in fixed income), which tend to be more cyclical in nature.

Performance and Risk

While our goal is to provide diversification through different alpha sources we also seek to deliver strong riskadjuste returns over time. While DAA takes a small number of high conviction positions, we can see meaningful swings in relative short-term performance. Over the long-term, however, we believe these high conviction positions should accrue to meaningful outperformance on both an absolute and risk-adjusted basis.

While it is arguable whether five-years is considered “long-term” the Fund’s risk-adjusted performance has met our expectations through thoughtful positioning and risk management. We believe we have a process in place to provide a unique source of alpha in different market environments.

Outlook

We believe the ability to capitalise on market dislocations or value opportunities may be more important over the next five years than it has been over the previous five years. Recent history has been a period of relative calm in the capital markets due in part to accommodative global monetary policy, low geopolitical risks and strong fundamentals in both the equity and fixed income markets. As major central banks move to tighten policy to more “normal” levels we expect to see greater levels of volatility and hence better opportunities for market dislocations. We continually monitor the different markets and seek to be proactive as markets are forward-looking. Through our disciplined approach we believe we can add value throughout the market cycle and provide a differentiated source of return.

Important Information

This document and its contents are directed only at persons who have been classified by SEI Investments (Europe) Limited as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook.

This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, which is authorised and regulated by the Financial Conduct Authority. No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

The value of an investment and any income from it can go down as well as up. Returns may increase or decrease as a result of currency fluctuations. Investors may get back less than the original amount invested. Derivatives can amplify share price volatility by increasing the Fund’s sensitivity to underlying risks such as market, interest rate and credit. Derivatives may expose the Fund to credit risks of counterparties, who may not meet payment obligations. Volatility from derivatives may cause the Fund to liquidate
portfolio positions when it would not be advantageous to do so. Equities are subject to material market risk. Their values tend to be volatile and can decline quickly or over extended periods of time. A decline in the credit quality, or perceived credit quality, of an issuer could cause the value of investments held by the Fund to decline. Also, the issuer of an investment held by the Fund may not meet its payment obligations. Increases in interest rates are likely to cause the value of bonds or similar assets held by the Fund to decline in value. Securities from emerging markets issuers may have greater susceptibility to certain risks compared to securities from developed market issuers. These include liquidity, exchange rate, political, credit, operational and regulatory risk.

Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

Data refers to past performance. Past performance is not a reliable indicator of future results.

Investments in SEI Funds are generally medium- to long-term investments.

SEI sources data directly from Factset, Lipper, and BlackRock, unless otherwise stated.