Summary

Market Overview

A path to a strong restart

• It looks to be full-steam ahead for the global economy and the rally in risk assets (equities, commodities, high-yield bonds, real estate and currencies).
   
• Equity and equity-like fixed income markets delivered gains in Q2 2021, while concerns over the state of the pandemic partially reversed the ‘great rotation/reopening’ trade.
   
• The big question is whether the inflationary pressures seen this year are as transitory as central bankers claim.
   
• Potential stock market movers include global central-bank actions on interest rates, US political support for fiscal stimulus/tax hikes and COVID-19.

Stability Focused Funds

Performance

Portfolio Contributions
 

Growth Focused Funds

Performance
 

Portfolio Contributions
 

Fund Commentary

Risk assets – equities, commodities and higher yielding corporate credit - achieved solid gains over the second quarter as the global economic recovery continued to gather pace. Global equity markets, having long anticipated the economic improvement we are now seeing, for the most part delivered strong and rather uniform performance.

While equity markets continued to display a strong upward trajectory this quarter, the dynamics within markets were notably different. The reflation trade that had characterised the end of last year and the start of this year took a pause over the second quarter as investors digested recent gains and took on board falling inflation expectations and bond yields. This was compounded by a slightly more hawkish tone on inflation from the US Federal Reserve and an indication that interest rate hikes and a tapering of asset purchases may occur sooner than initially anticipated, calling into question the Fed’s tolerance for periods of higher inflation.

As a result, within equity markets, leadership rotated from non-US to US, and within the US in particular, from smaller companies to larger companies, from value to growth. Value stocks, expected to benefit from faster economic growth, rising yields and price increase, sold off sharply in June. By contrast, growth and mega-cap technology stocks strongly rebounded on lower anticipated inflation and lower interest rates. High quality and profitable companies also outperformed over the second quarter, while low volatility names lagged. Results across Momentum were mixed; the rotation away from cyclicals was a headwind for Price Momentum that had begun to gravitate towards this segment of the market, while the Earnings Revision component of Momentum was able to adjust more swiftly and generally made a positive contribution over this quarter.
Within bond markets, the quarter proved to be a relatively benign environment for government bonds and credit. Yield of development market government bonds broadly tracked sideways or slightly lower, yield curves flattened, inflation expectations receded and credit spreads continued to grid tighter. Range-bound government bond yields at an aggregate level did mask some regional differences though. After being one of the main casualties of the first quarter bond market sell-off, US Treasuries recovered somewhat this quarter, while European government bonds took their turn to feel the pressure as Europe’s vaccine rollout programme gathered pace.

Despite the slight shift in Fed rhetoric, credit spreads continued to rally against a backdrop of strong and improving credit fundamentals, abundant liquidity and persistently strong investor appetite for yield. Emerging market debt produced the strongest returns this quarter, followed closely by higher yielding corporate debt.

Stability Focused Portfolios

Against this backdrop, the SEI Defensive, Conservative and Moderate Funds returned between 0.77% and 2.74% this quarter.
The Funds’ exposure to equities, mostly in the form of defensive, low volatility equities, had the largest positive impact on performance. While defensive equities did not keep pace with the broad market in what was a constructive environment for global equities, they continued to provide meaningful risk reduction while posting solid positive total returns.

The Funds’ were also positively impacted by exposure to commodities as well as allocations to High Yield and Emerging Market Debt.

From an active management perspective, the Portfolios’ High Yield component benefitted from good security selection within the energy, chemicals and media sectors. Brigade, T.Rowe Price and JPMorgan were our top performing high yield managers over the quarter. Within Emerging Market Debt, the Portfolios’ benefitted from a general risk-on positioning and as well as longer duration positioning in those countries that performed strongly over the quarter. Colchester and Ninety One, both local currency mandates, and Neuberger Berman, who manage a blended hard and local currency mandate, were our top contributing managers.

Finally the SEI Moderate Portfolio, with a higher weight to UK equities, benefitted from its quality exposure through Lindsell Train, and positive stock selection within the retail sector.


Growth Focused Portfolios

Results for the SEI Core, Balanced, Growth and Aggressive Portfolios ranged from 3.9% to 5.43% over the second quarter.
With the change in equity market leadership this quarter, the Portfolios’ strategic allocations to smaller capitalisation stocks and diversification across higher yielding credit (with the exception of SEI Aggressive) were relative headwinds. Although in most cases was offset by the Funds’ allocation to inflation sensitive assets, most notably Commodities.

From an active management perspective, results were mixed. For those Portfolios’ with fixed income exposure, active positioning was modestly beneficial, aided by our managers’ positioning within High Yield (positive security selection within energy, chemicals and media) and emerging market debt (general risk-on positioning as well as longer duration positions in those countries that outperformed this quarter).

Within equities, and echoing the market environment from much of last year, higher risk value stocks in sectors such as Financials underperformed. The Portfolios’ pro-value positioning, as well as increased diversity by being underweight the mega-cap stocks, limited their participation in this quarter’s big-tech bounce. Those style headwinds were reflected in the portfolio of the Portfolio’s Value managers, who lagged over the quarter in line with the performance of the alpha source and diversity stance.
Small cap equity though, with its lack of exposure to mega-cap technology names, experienced contrasting style outcomes this quarter with Value extending its recent outperformance. Quoniam, the Portfolios’ Pan European Small Cap manager, benefitted by being underweight expensive European small cap stocks.

The Portfolios’ also experienced some modest outperformance from its UK equity sleeve, with strong results from our quality orientated manager, Lindsell Train, who performed well as a result of their core holdings in established consumer franchises.


Tactical Asset Allocation

The Portfolios’ various tactical asset allocation positions experienced mixed results over the quarter, although in aggregate added value over the period. The strongest performing position was our exposure to broad commodities. All major commodity sectors produced positive returns over the quarter, led by the energy sector. Our pro-cyclical equity tilt and inflation swaps also contributed, while our positions designed to benefit from steeper yield curves and higher long term interest rates in the US detracted.

Our tactical position in Gold, which was initiated in March 2020 and reduced more recently, was closed out at the end of the quarter on the view that current prices reflect much of our original rationale for holding the position.


Outlook and Positioning

It remains our contention that the global recovery and expansion have a long way to go, sustained by the continued progress on the vaccine front as well as supportive fiscal and monetary policies. With economies around the world slowly opening up and interest rates hovering at extraordinary low levels, the dominant trend signals further gains over the next year or two.

Across the Portfolios’ fixed income exposures, positioning remains largely unchanged. The low spread, low volatility and low dispersion environment we currently face can be a challenging environment, and in the pursuit of excess returns it would be tempting to increase exposure to credit and/or migrate down in credit quality. However, we are also price-conscious and believe that current valuations warrant caution, notwithstanding the improving fundamental backdrop. We are therefore running fairly conservative credit overweights as abundant supply and full valuations mean that further spread compression will be a much slower grind from here.

Within equities, we maintain our strategic focus on Value, Momentum and Stability (Profitability) as our key alpha source pillars, implemented by active managers. After two strong quarters for Value, a correction was inevitable. Although it is impossible to tell how long it would last, we believe that the fundamental drivers for a multi-year value rally remain in place, namely higher inflation, accelerating real economy and challenging valuation multiples for many fashionable growth stocks.


Manager Changes

Principal Global Investors, LLC was removed from the Asia Pacific (ex-Japan) Equity building block during the quarter. We decided to remove the strategy due to organizational changes that have occurred at Principal, which caused turnover in the strategy’s senior portfolio management team. Additionally, Principal’s staffing resources have been reduced over time. The assets in Principal’s strategy have been transferred to the newly-added Sophus Capital’s Asia Pacific ex-Japan strategy.

Sophus Capital was added to the Asia Pacific (Ex-Japan) Equity building block during the quarter. The strategy has a bias towards momentum-oriented stocks, or those whose prices are expected to keep moving in the same direction (either up or down) and are not likely to change direction in the short term. We believe the combination of quantitative and fundamental inputs results in a resilient and repeatable process, enabling the team to identify opportunities quickly, while adapting and avoiding potential risks.

Global Market Performance

Representative market indices

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