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Active versus Passive Investing
Background
The debate is ongoing over which investment approach has the potential
to generate the greater amount of return over the longer term
•
Actively managed funds attempt to outperform the relevant
benchmark or index and believe that inefficiencies and
irregularities in the market can be exploited to generate potentially
higher returns
•
Passive funds attempt to correlate the holdings of an index with
the same securities and in the same proportions for investors
unwilling to take the risk of attempting to beat the market
For Professional Client Use Only – Not for Distribution to Retail Clients
Active Management – advantages & disadvantages
Advantages:
•
experienced and highly qualified investment teams following markets closely
and making informed decisions based on extensive research and market
trends
•
potential for returns generated in excess of those by the relevant index
•
ability to take precautionary action when market is going into downturn
Disadvantages:
•
higher operating expenses feeding into fees
•
effectiveness of Manager strategy / style may be variable in different market
climates
•
potential for poor decision making when acting unilaterally rather than in
accordance with an index
For Professional Client Use Only – Not for Distribution to Retail Clients
Passive Management – advantages & disadvantages
Advantages:
•
minimal decision making with actions purely based on the movement of
holdings in the relevant index
•
Low operating expenses leading to cheaper fees
Disadvantages:
•
lack of control and ability to take defensive measures with all actions dictated
by the movements of the index
•
Investors must be satisfied with market returns with no out-performance
possible
For Professional Client Use Only – Not for Distribution to Retail Clients
Not all indices are created equal
● Variation in sector and market cap weights across UK indices
Sector
Top 10 Market
Cap
FTSE All Share
39.79
FTSE 100
47.45
FTSE 250
19.05
FTSE 350
40.90
Citigroup BMI UK
42.21
MSCI UK
47.16
Variance
28.40
Marked concentration in top 10 stocks and
certain industries prevents diversification
Weight Variance
across Indices
Consumer Discretionary
21.52
Consumer Staples
10.89
Energy
15.64
Financials
2.47
Health Care
7.91
Industrials
21.33
IT
7.49
Materials
8.91
Telecoms Services
5.59
Utilities
3.39
* Data source: Factset
Data as of August 2008
For Professional Client Use Only – Not for Distribution to Retail Clients
Financial markets do not perform consistently…
Performance of sectors varies considerably through time and highlights the need for the diversification
of portfolios and the spreading of exposure in the pursuit of consistent returns with controlled risk.
Best performing
Worst performing
Based on annual returns of indices between 01/01/1997 & 31/12/2007. Sources SEI Investments (Europe) Ltd, Indices; SEI sources data directly from the following vendors: Morgan Stanley Capital International (MSCI),
Russell, TOPIX, Lehman Brothers and Merrill Lynch in base currencies and converts to the relevant currency using WM Reuters 4pm Spot rates. *JPM EMD Global Diversified Index used from 01/01/06 – 31/12/07
For Professional Client Use Only – Not for Distribution to Retail Clients
Performance within markets can also vary according to style
Performance within markets can fluctuate according to trends in the market based on style. Portfolios diversified
across style, asset type and region allow for consistency of returns at potentially lower risk levels.
Shifting Global Style Leadership
December 1995 to January 2008
420
380
Growth Managers
outperform
Small Cap Value
Managers outperform
300
260
220
180
140
100
ec
-9
Ap 5
r-9
Au 6
gD 96
ec
-9
Ap 6
r-9
Au 7
gD 97
ec
-9
Ap 7
r-9
Au 8
gD 98
ec
-9
Ap 8
r-9
Au 9
gD 99
ec
-9
Ap 9
r-0
Au 0
gD 00
ec
-0
Ap 0
r-0
Au 1
gD 01
ec
-0
Ap 1
rA u 02
gD 02
ec
-0
Ap 2
r-0
Au 3
gD 03
ec
-0
Ap 3
r-0
Au 4
gD 04
ec
-0
Ap 4
r-0
Au 5
gD 05
ec
-0
Ap 5
r-0
Au 6
gD 06
ec
-0
Ap 6
r-0
Au 7
gD 07
ec
-0
7
60
D
Cumulative Returns (%)
340
World Core
World Large Cap
World Small Cap
World Growth
World Value
Source: S&P/Citigroup Indices
For Professional Client Use Only – Not for Distribution to Retail Clients
From Style Diversified Portfolios to Alpha Diversified Portfolios
SEI’s actively managed Manager-of Manager funds are diversified across both investment styles as
well as potential alpha sources with specialist Managers identified and incorporated into portfolios.
Style-Based Perspective
Alpha-Based Perspective
Forward Insight
Large Cap Value
Large Cap Growth
Behavioural
Value
Small Cap Value
Small Cap Growth
Momentum
Statistical
• In an effort to build more efficient portfolios SEI’s Manager-Of-Managers investment philosophy looks
beyond traditional approaches to investment management
• The line between traditional and alternative asset management is blurring and many investment
managers are increasingly using techniques currently available to add incremental value.
For Professional Client Use Only – Not for Distribution to Retail Clients
Portfolios optimised to maximise chances of meeting objectives
Universe
•
Select most effective alpha source
and manager exposures from
available universe
•
Weight Managers to build an
optimally diversified portfolio
•
The result is a robust portfolio with
multiple sources of alpha that is
generally less dependent on the
market’s direction
•
The number of managers in the
Portfolio is a function of the breadth
and depth of the market and of the
differentiation within the universe
Manager 1
Manager 2
Behavioural
Value Premium
Manager 4
Manager 3
Forward Insight
Momentum
Premium
SEI Portfolio
Manager
Return Source
Tracking
Error *
Manager 1
Behavioural
6.00
Manager 2
Value Premium
4.50
Manager 3
Forward Insight
3.50
Manager 4
Momentum Premium
5.00
Total Portfolio
Style diverse
2.75
* For Illustration purposes only
For Professional Client Use Only – Not for Distribution to Retail Clients
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, or an Eligible Counterparty, for the purposes of the FSA New Conduct of Business
Sourcebook.
This information is issued by SEI Investments (Europe) Limited, 4th Floor, Time & Life Building 1 Bruton Street, London W1J
6TL which is authorised and regulated by the Financial Services 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. Investors may not get back the original
amount invested. If the investment is withdrawn in the early years, it may not return the full amount invested.
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. Narrowly focused investments and smaller companies typically exhibit higher volatility.
Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence.
Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-todate, 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.
Past performance is not a guarantee of future performance.
Investment in the range of SEI’s Funds is intended as a long-term investment.
For Professional Client Use Only – Not for Distribution to Retail Clients