SEI Alpha Sources: An Overview
Evaluating potential alpha sources—that is, drivers of excess returns relative to a benchmark—is a key aspect of our investment process. We continuously study characteristics that are historically associated with excess risk-adjusted returns, which we call factors, along with common investor decision-making biases that tend to foster and give rise to opportunities presented in the overall market. This research allows us to identify desired alpha sources across our equity, fixed-income and alternative investment portfolios. It also informs a framework from which we can assess prospective managers and the efficacy of their respective investment processes. We place investment managers in a given portfolio based on our view of their ability to provide persistent exposure to a specific alpha source or alpha sources.
Our alpha-source framework continues to evolve over time, reflecting the ever-changing nature of global markets. The terminology can therefore be expected to change periodically, as the value of our effort is not in naming specific alpha sources, but rather in recognising that sources of return can and will vary over time.
Our alpha sources fall into two broad categories:
Systematic alpha sources
- Arise from the collective irrational behaviour of market participants, which causes security prices to deviate from their intrinsic or fair values
- Can be accessed systematically through two different investment approaches:
- Traditional active management, which employs qualitative and quantitative analysis of fundamentals and factors (characteristics historically associated with excess risk-adjusted returns)—seeking to provide exposure to both systematic and idiosyncratic alpha sources
- Factor investing, which employs quantitative rules-based portfolio construction—seeking to provide systematic exposure to known market inefficiencies. Factor investing typically comes with lower costs than fully-active strategies
- Traditional active management, which employs qualitative and quantitative analysis of fundamentals and factors (characteristics historically associated with excess risk-adjusted returns)—seeking to provide exposure to both systematic and idiosyncratic alpha sources
Idiosyncratic alpha sources
- Generated by unique insights that traditional active managers can garner through research and analysis
- Cannot be systematically replicated
Our alpha-source framework
We further categorise alpha sources by “factor groupings”—which we employ as proxies to measure and potentially capture underlying drivers of return. The charts below include examples of these factor groupings.
It is worth noting that our long-term, strategic baseline allocation is to cheaper, higher quality/lower risk securities with positive momentum/improving fundamentals. While we think of this as our “neutral” position, it is not “style neutral.” Generally speaking, even though our starting point for portfolio construction is an equal allocation to each alpha source, portfolio managers determine the actual allocations to reflect expected risk contributions and local market nuances for each individual portfolio.
Important Information
The opinions and views in this commentary are of SEI only and are subject to change. They should not be construed as investment advice.
Investments in SEI Funds are generally medium- to long-term investments. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.
The SEI Global Assets Fund Plc, SEI Global Investments Fund Plc, and SEI Global Master Fund Plc (the “SEI Funds”) are structured as open-ended collective investment schemes and are authorised in Ireland by the Central Bank as a UCITS pursuant to the UCITS Regulations. The SEI Funds are managed by SEI Investments, Global Ltd (“SIGL”). SIGL has appointed SEI Investments (Europe) Ltd (“SIEL”), an affiliate of SIGL, (together “SEI”) to provide general distribution services in relation to the SEI Funds either directly or through the appointment of other sub-distributors. The SEI Funds may not be marketed to the general public except in jurisdictions where the funds have been registered by the relevant regulator. The matrix of the SEI fund registrations can be found here seic.com/GlobalFundRegistrations.
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.
In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. Narrowly focused investments and smaller companies typically exhibit higher volatility. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.
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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. Please refer to our latest Full Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Key Investor Information Documents and latest Annual or Semi-Annual Reports for more information on our funds. This information can be obtained by contacting your Financial Adviser or using the contact details shown above. SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.