In early 2020, SEI Manager Research undertook a first-of-its-kind project for our team: reviewing investment manager downgrades made between 2017 and 2019 to see if we could use them to improve our decision-making process.

Background

As part of our downgrade process, analysts must provide a rationale to the Manager Review Committee that explains why they are seeking such an action. To us, a downgrade is not necessarily related to poor investment performance; it may be due to a number of reasons, such as personnel changes, style drift or changes in the broader investment environment.

What we learned

We reviewed the collection of our downgrade rationales from 2017 to 2019 across 66 strategies covering all asset classes overseen by Manager Research in an attempt to identify common themes.

Our research uncovered 40 distinct downgrade rationales, which have formed the basis of a lessons-learned checklist that we have formally incorporated into our research process. We view this checklist as a way to highlight potential evolving risks to a strategy and believe it should help us improve our hiring and selling discipline over time.

Our analysts now complete this checklist not only during the initial recommendation of new strategies, but also during the annual strategy recertification process. The components of the checklist align with the seven key evaluation criteria that we use to assess all managers:

• Firm                                           
• Product
• People
• Philosophy
• Process
• Portfolio construction and risk management
• Empirical support

Many of the points on the checklist reflect our historical considerations in our manager evaluation process. The benefit of this approach is that it has prompted us to not only revisit whether we should place more emphasis on these points when hiring or removing a manager—but to also think more creatively about how we might assess some of these points.

Lessons learned checklist examples

Below are examples from our checklist—one for each key evaluation criterion that we use to assess managers, accompanied by a description of how we have evolved our approach to better capture the risk associated with each respective point.

Firm
A number of downgrades over the last three years were a result of cultural shifts within an organization. Examples include a culture that became too sales-driven (leading to portfolio managers departing to work at a more investment-led firm); an organizational change that disrupted the focus of key investors/teams (such as a merger/acquisition); and internal tensions between equity owners on the direction of the business, which led to elevated levels of management turnover.

Checklist question
Does the culture of the firm promote investment professional stability?

How we have evolved our approach
We now place more emphasis on meeting with non-investment members of an organization’s senior management team (or individuals to whom the portfolio manager may report). We also now place greater emphasis on assessing the evolution of a firm’s culture and are more likely to pass on a manager if there is evidence of internal tension.

Product
Capacity is always a consideration for investors. If a strategy gets too large, its performance may deteriorate. That said, small strategies also face challenges—typically with respect to resourcing, access to markets and higher risk of closing.

Checklist question
Has the product grown to such an extent that the portfolio is no longer nimble enough to execute trades that have historically added value?

How we have evolved our approach
Measuring capacity can be difficult, as it is a function of portfolio construction, manager style, trading capabilities and opportunity set. To address these challenges, we have developed in-house frameworks across a range of fixed-income asset classes to provide estimated capacity (with a similar approach in development for equities). We commonly leverage third-party risk tools—such as BlackRock Solutions—to help measure the liquidity of a portfolio.

With respect to strategies that have a small amount of assets under management, we have added a criterion for product viability to PRISM, the proprietary quantitative scorecard our team uses to codify our assessment and compare managers on a like-for-like basis. PRISM also provides transparency to the analyst’s conviction for a given strategy.

People
Our research has shown that staffing changes can materially impact a team’s culture. We have also noted that tension within a team can often rise as a result of promotions (or, conversely, a lack of promotions). This can foreshadow future turnover or reduce team productivity on account of increasing disillusionment.

Checklist question
Has a recent promotion potentially had a detrimental impact on the culture of the team?

How we have evolved our approach
While we have always met with junior team members, we now focus more on internal team cultural dynamics and how they view the team structure. For example, we have been spending more time sitting in on internal meetings to better understand team dynamics. We are also more wary about junior team members taking over a product following the departure of a senior member of an organization. Accordingly, we have added a criterion that addresses team culture to our PRISM scorecard.

Philosophy
Many of the portfolio managers with whom we work started their careers as specialists in a particular asset class. Over time, they may have been asked to run strategies in other asset classes. For example, a U.K. fixed-income specialist manager may have been tapped to run a European fixed-income strategy. We have noted that managers tend to take the philosophy that worked well for them in their original asset-class specialty and apply it to other strategies they run—where it may not work as well. We note that this sort of philosophical misalignment is something we often witness more with fixed-income managers.

Checklist question
Has the philosophy been ported over from another product or asset class with little regard for the intricacies or nuances of the asset class in which the team actually invests?

How we have evolved our approach
We now place a greater emphasis on understanding the intricacies of a manager’s investment philosophy and how appropriate it may be for a given asset class given the unique aspect of each market and its technicals (such as different price-incentive buyers, forced sellers, trading costs, and so forth). Using our risk systems, we are able to closely examine a manager’s portfolio to understand its alignment with the original philosophy in the new asset class.

Process
We often see managers behave in a manner inconsistent with what we might expect, given their style. In many cases, this can be linked back to well-known behavioral biases, such as endowment bias, anchoring and more.

Checklist question
Does the manager exhibit any of the common behavioral biases associated with their investment style (for example, falling in love with a position, loss aversion, and so forth)?

How we have evolved our approach
We have developed a proprietary decision-making grid to help us assess how a manager reacts to a challenging period of underperformance. We have also developed buy/sell tools to assess trading behavior on individual securities. Lastly, within our PRISM scorecard, we now disaggregate portfolio manager attributes into six criteria. We believe this may provide some insight into which managers may be more likely to exhibit behavioral biases based on our view of their thoughtfulness as investors.

Portfolio construction and risk management
Macro investing (such as forecasting interest rates and country growth rates) is tough. While we think a number of managers have a competitive advantage in forming macro views, we also believe there is an even smaller subset of managers who can translate their macro views into trade ideas that should capture alpha if the macro view is correct. Essentially, we believe there are two key components of a successful macro investor. The first is getting the macro call right. The second is positioning the portfolio in such a way that allows it to benefit from that macro call.

Checklist question
Is there deviation between the formation of macro views and how they are expressed in the portfolio?

How we have evolved our approach
Using third-party systems (such as BlackRock Solutions and FactSet), we are able to stress-test a portfolio based on potential future market conditions to determine if it will move in line with expectations if a manager’s macro view plays out. In addition, we now place more scrutiny on trade construction, particularly in fixed income.

Empirical support
Sometimes, managers react to previous performance in a way that is inconsistent with what we view as appropriate. Examples include cutting risk after a period of strong performance to “lock in” alpha, despite ample opportunity to add more alpha, or adding risk after a period of poor performance to try and “catch up” returns with an alpha target. Some managers have a captive client base in which the main risk to the business is outflows (which are usually the result of significant underperformance); therefore, we see some managers in this category perpetually running low amounts of risk.

Checklist question
Have we seen evidence that recent poor/strong performance may have caused the manager to change its risk profile or other exposures to broad factors that are inconsistent with what we would expect?

How we have evolved our approach
We have quantitative tools to analyze trading patterns, assess buy and sell timing and to understand characteristics of securities at purchase and at sale (and to see if those are different from a historical basis). We have also developed SEI custom peer groups to allow us to better compare managers against appropriate peers and to understand whether performance has been favorable or unfavorable given the manager’s style. We also have an internal library of SEI equity factors that help us evaluate a manager’s style exposures over time.

Conclusion

In our view, our lessons-learned exercise not only provided us with one-time valuable perspective on how to improve our decision-making; our findings from this exercise were meaningful enough to warrant incorporating into our approval and review processes. We expect our checklist to evolve over time as we refine our decision-making process.

With more than 30 years of experience in assessing investment firms, SEI Manager Research is tasked with sourcing skillful managers that help to meet our clients’ investment goals. To that end, we look to continuously learn from our experiences and to improve our processes. We view our lessons-learned checklist as one way to apply the knowledge we have gained through the years to benefit our clients.



















Important Information

The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the Strategies or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional. 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. There is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Strategies. Positioning and holdings are subject to change. All information as of the date indicated.

This material may contain “forward-looking information” (“FLI”). FLI is disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. FLI is subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from expectations as expressed or implied in this material. FLI reflects current expectations with respect to current events and is not a guarantee of future performance. Any FLI that may be included or incorporated by reference in this material is presented solely for the purpose of conveying current anticipated expectations and may not be appropriate for any other purposes.

Information contained herein that is based on external sources or other sources is believed to be reliable, but is not guaranteed by SEI, and the information may be incomplete or may change without notice. This document may not be reproduced, distributed to another party or used for any other purpose.

There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. There may be other holdings which are not discussed that may have additional specific risks. Narrowly focused investments and smaller companies typically exhibit higher volatility. 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. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Bonds will decrease 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. SEI products 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.

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. Investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.

Index returns are for illustrative purposes only, and do not represent actual account performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.

Not all strategies discussed may be available for your investment.

This material is not directed to any persons where (by reason of that person’s nationality, residence or otherwise) the publication or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not rely on this information in any respect whatsoever.

Information provided by in the U.S. by SEI Investments Management Corporation.

Information provided in Canada by SEI Investments Canada Company, the Manager of the SEI Funds in Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Information issued in the UK 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. Investments in SEI Funds are generally medium- to long-term investments.

The SEI Global Assets Fund Plc, SEI Global Investments Fund Plc, and SEI Global Master Fund Plc (the “SEI UCITS 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 UCITS Funds are managed by SEI Investments, Global Ltd (“SIGL”). SIGL has appointed SEI Investments (Europe) Ltd (“SIEL”) to provide general distribution services in relation to the SEI UCITS Funds either directly or through the appointment of other sub-distributors. The SEI UCITS 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 UCITS 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 UCITS Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. 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.

SIEL has appointed SEI Investments (Asia) Limited (SEIAL) of Suite 904, The Hong Kong Club Building, 3 Jackson Road, Central, Hong Kong as the sub-distributor of the SEI UCITS funds. SEIAL is licensed for Type 4 and 9 regulated activities under the Securities and Futures Commission (“SFC”)

Singapore

The offer or invitation to subscribe for or purchase shares of the Sub-Funds (the “Shares), which is the subject of this Information Memorandum, is an exempt offer made only: (i) to “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “Act”), (ii) to “relevant persons” pursuant to Section 305(1) of the Act, (iii) to persons who meet the requirements of an offer made pursuant to Section 305(2) of the Act, or (iv) pursuant to, and in accordance with the conditions of, other applicable exemption provisions of the Act.

No exempt offer of the Shares for subscription or purchase (or invitation to subscribe for or purchase the Shares) may be made, and no document or other material (including this Information Memorandum) relating to the exempt offer of Shares may be circulated or distributed, whether directly or indirectly, to any person in Singapore except in accordance with the restrictions and conditions under the Act. By subscribing for Shares pursuant to the exempt offer under this Information Memorandum, you are required to comply with restrictions and conditions under the Act in relation to your offer, holding and subsequent transfer of Shares.

This information is being made available in Hong Kong by SEIAL. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.

The SEI UCITS Funds have not been authorised by the SFC in Hong Kong and will be an unregulated collective investment scheme for the purpose of the Securities and Futures Ordinance of Hong Kong (the “SFO”). Shares of the SEI UCITS Funds may not be offered or sold by means of any document in Hong Kong other than (a) to professional investors as defined in the SFO and its subsidiary legislation or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (“CO”) or which do not constitute an offer to the public within the meaning of the CO. This document does not constitute an offer or invitation to the public in Hong Kong to acquire shares in the SEI UCITS Funds. These materials have not been delivered for registration to the Registrar of Companies in Hong Kong.

It is the responsibility of every recipient to understand and observe applicable regulations and requirements in their jurisdiction. This information is only directed at persons residing in jurisdictions where the SEI UCITS Funds are authorised for distribution or where no such authorisation is required.

The Shares may not be offered, sold or delivered directly or indirectly in the US or to or for the account or benefit of any US Person except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933 and any applicable state laws.

This information is made available in Latin America FOR PROFESSIONAL (non-retail) USE ONLY by SIEL.

Any questions you may have in relation to its contents should solely be directed to your Distributor. If you do not know who your Distributor is, then you cannot rely on any part of this document in any respect whatsoever.

SEI has not considered the suitability or appropriateness of any of the SEI UCITS Funds against your individual needs and risk tolerance. SEI shall not be liable for, and accepts no liability for, the use or misuse of this document by the Distributor. For all Distributors of the SEI UCITS Funds please refer to your sub-distribution agreement with SIEL before forwarding this information to your clients. It is the responsibility of every recipient to understand and observe applicable regulations and requirements in their jurisdiction. The Distributor is, amongst other things, responsible for ensuring that the Shares are only offered, and any literature relating to the SEI UCITS Funds (including this document) are only distributed, in jurisdictions where such offer and/or distribution would be lawful.

Issued in South Africa by SEI Investments (South Africa) (Pty) Ltd. FSP No. 13186 which is a financial services provider authorised and regulated by the Financial Sector Conduct Authority (FSCA). Registered office: 3 Melrose Boulevard, 1st Floor, Melrose Arch 2196, Johannesburg, South Africa.

A number of sub-funds of the SEI Global Master Fund plc and the SEI Global Investment Fund plc (the “SEI UCITS Funds”) have been approved for distribution in South Africa under s.65 of the Collective Investment Schemes Control Act 2002 as foreign collective investment schemes in securities. If you are unsure at any time as to whether or not a portfolio of SEI is approved by the Financial Sector Conduct Authority (“FSCA”) for distribution in South Africa, please consult the FSCA’s website (www.fsca.co.za).

Collective Investment Schemes (CIS) are generally medium to long term investments and investors may not get back the amount invested. The value of participatory interests or the investment may go down as well as up. SEI does not provide any guarantee either with respect to the capital or the return of an SEI UCITS Fund. The SEI UCITS Funds are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available upon request from SEI. The SEI UCITS Funds invest in foreign securities. Please note that such investments may be accompanied by additional risks such as: potential constraints on liquidity and the repatriation of funds; macroeconomic, political/emerging markets, foreign currency risks, tax and settlement risks; and limits on the availability of market information.

For full details of all of the risks applicable to our funds, please refer to the fund’s Prospectus. Please contact your fund adviser (South Africa contact details provided above) for this information.

This commentary is intended for information purposes only and the information in it does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act.