Hi, I’m Kevin Barr, Head of SEI’s Investment Management Unit. Today, I’m speaking with Eugene Barbaneagra, Portfolio Manager for our Select Equity portfolios.
Thank you for joining me Eugene. I’d like to start by asking you how the current market conditions are impacting the portfolios.
In our World Select Equity Strategy we target concentrated, high conviction active managers, who invest across the broad range of market capitalization. Of course, that means our underweight to mega-cap and overweight to mid and small caps have detracted in recent liquidation. This is more-or-less a permanent trait of active management, which adds value in the long-run but of course is susceptible to such fear-driven events.
We also favor value, strategically, and even more so tactically. With value being more concentrated in brick-and-mortar traditional economy, and also energy, the alpha source also produced a strong headwind.
On the positive side – our draw-down “hedge” was implemented through a currency specialist Rhicon, whose process tends to benefit from environment of rising volatility. As expected, the manager realized strong profits over the last 2 months, partially mitigating the drag from our mid-cap and value bias.
Where are we seeing opportunities arising from this crisis?
We like value, we like small and we like active. Value is an alpha source that we always like. But today our indicators, such as valuation dispersion, exhibit highest readings ever. Something that was once-in-a-generation is turning out once-in-a-lifetime opportunity. We see it ourselves, we hear it from our managers.
Liquidity shocks also created outsized mispricing for small and midcaps. We had a similar effect right after September 11, 2001. Yet it took just one year for small caps not only to recover but also beat their large- cap counterparts.
Finally, forced liquidation opens up opportunities for selection, which we expect our managers to try to participate in. Steep discounts are available due to association with troubled sectors (e.g. energy stocks with strong balance sheets), myopic horizon (e.g. efficient, well capitalized airlines), or predispositions (banks have been treated the same way as in 2008).
How are the portfolios positioned for the eventual rebound?
Although the overall market direction has changed dramatically, the drivers within equities remained broadly the same. As such we don’t see a need for drastic changes. We are also careful not to overtrade in such a volatile market – bid/ask spreads are substantially higher than normal, while volumes in large parts of the market are only appearing at the close of the trading day. Thus we are maintain our strategic and tactical allocation in favor of value. Implemented through concentrated managers, this also manifests in a mid-cap overweight.
That being said, we have trimmed our position in a relatively better performing managed volatility strategy from about 9-10% to 6% and also trimmed some momentum, in the region of 1-2%.
Do you think this time is a good time for active management?
Yes, I do. Although no active manager will ever say otherwise, recent forced liquidation and myopic time-horizons are offering truly special opportunities for diligent long-term investors. We believe the pandemic, as bad as it could be, will still be over next year. But opportunities to own good businesses for half the price do not come around often.
Thank you Eugene.
Glossary of Terms:
Alpha source: Our strategies are designed to capitalize on long-term drivers of market performance through exposure to persistent sources of returns such as mean reversion, trend-following and stability. We have refined our approach to identifying these alpha sources and the factor groups we employ as proxies to measure and capture their performance.
Momentum Alpha Source: The investment manager seeks to benefit from investor under-reaction—due to anchoring. Such groups of stocks trend in price as perceptions change directionally and serially with incoming data, leading to herding behavior by investors.
- Stability Alpha Source: The investment manager seeks to benefit from investor tendency to undervalue lower-risk, higher-stability businesses—resulting from a focus on short time horizons and overconfidence in forecasts for momentum-driven stocks. Stability-oriented stocks have the power to exceed market expectations by consistently outperforming (rather than reverting to average market returns) and through the power of stable, long-term compounding.
- Value Alpha Source: The investment manager seeks to benefit from investor overreaction—resulting from aversion to loss. Such groups of stocks revert to the mean, as fear over the perception of the investment’s risk dissipates.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.
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 and is for educational purposes only. Past performance is not a guarantee of future results. Positioning and holdings are subject to change. All information as of April 6, 2020.
Investing involves risk including possible loss of principal. Narrowly focused investments and smaller companies typically exhibit higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. There can be no assurance that strategies discussed will or won’t be successful.
Not all strategies discussed may be available for your investment.