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.
