Transcript SEI Managed Volatility

Staying the Course through Market Volatility
March 2008
Greg Williams is a registered representative of and offering securities through Securities Service Network, Inc., member FINRA/SIPC
Fee based advisory services are offered through SSN Advisory, Inc., a registered investment advisor.
Office of Supervisory Jurisdiction: 10207 Technology Drive, Suite One, Knoxville TN 37932 (865) 777-4677
Navigating through Market Turbulence
• Recent market volatility has left some investors feeling uneasy
about their portfolios
• S&P 500 declined 10% from October 9th to November 26
• S&P 500 rebounded in December, ending the year at 3.5%
• And the rollercoaster ride continues…
• Through the first three weeks of January 2008, the S&P has declined 9.7%
As we come to terms with recent volatility, it is important
to revisit some basic principles about the stock market.
2
2007 S&P 500 Roller Coaster Ride
500 Index
US Equity Markets - A WildS&P
and
Bumpy Ride…
1600
Nov. 1st – US Financials fall
4.6%, the most since
September 2002
1575
Apr. 16th – S&P 500
surged to its highest in
more than six years
1550
Aug. 9th – All
10 industry
groups in the
S&P 500
dropped more
than 2%
1525
Value
1500
1475
Feb. 27th – US stocks plunged,
erasing all of 2007 gains after selloff in China spreads and sparked
the biggest rout in four years
1450
1425
1400
Aug. 28th – Financial shares
drive the S&P 500 down 2.4% as
487 of its members fell
1375
1350
Jan-07
March 13th – Mortgage Bankers Association reports that delinquencies for
sub-prime reached 13.33% in Q4, highest since Q203
Feb-07
Source: Bloomberg
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Date
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Putting Recent Volatility in Perspective
• October 9th to November 26th - S&P 500 Declined Just Over 10%
• Past 12 Months 1/02/07 through 12/31/07:
– S&P appreciated roughly 3.5%
– Total return basis nearly 5.5%
(includes dividend reinvestment)
• Year-to-Date through 1/18/08:
– S&P down roughly 9.75%
– Total return basis 9.67%
(includes dividend reinvestment)
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Short-term Market Swings are the Norm,
Not a Signal that the Sky Is Falling
Be Wary of Market Hysteria and Chicken Little!
• “This is not a prediction, it is a certainty - there will be serious disruption in the world’s
financial services industry. It’s going to be ugly”
-The Sunday Times, London
- As we know, Y2k came and went smoothly
• “Capitalism will come to an end in the United States around the year 2000”
• “Stock markets will start crashing by the end of 1997”
- Dr. Ravi Batra, Prof. of Economics, The Great Depression of 1990
- S&P 500 proceeded to return in excess of 20% for the years
1997, 1998 and 1999
It is important to evaluate financial news with a trusted Advisor
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Pundits and Media Contribute to the Hysteria…
Jan. 12th - “The biggest concern that investors have is not that a recession is likely
but that growth might be too strong”
Jan. 24th - “After this sluggish start to the year, we should have a pretty good stock
market as we go through 2007”
Feb. 20th - “While the mortgage market for borrowers with poor credit is behaving
in a ‘very problematic way’, the issue is unlikely to spread to the rest of the bank
industry….most of the problem loans are outside the banking system”
Mar. 13th - “People are panicking…Everyone is concerned about credit
and that access to capital will be severely restricted. If that happens,
nothing gets done.”
Mar. 20th - “It supports many peoples’ soft-landing scenarios, where
housing doesn’t get that bad.”
Aug. 9th - “The overnight rate banks charge each other in dollars jumped
to the highest in six years.”
Aug. 28th - “The Conference Board reported today consumer confidence fell the most since 2005,
while the S&P/CS Schiller said home values had the steepest tumble in at least five years in June.”
Nov. 1st - “There is more downside in financials. We just don’t know what the ultimate impact
is going to be for all the sub-prime difficulties.”
Dec. 10th - “Negative news from the banking industry are not that shocking anymore.
Now the question is what would the right timing for buying bank shares.”
Source: Bloomberg
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The Stock Market Can Be a Roller-Coaster Ride:
Be Careful When You Get Off!
•Over the short-term, stocks are volatile and difficult to predict
•Market response to concern about subprime mortgages and other
“recessionary” concerns:
• Investor panic that the economy would collapse
• Dow drops by 416 points on February 27
• Biggest one-day fall since the 9/11 attacks
• Dow then reaches a record high of 13,633 on May 30
• Breaks record 4 more times, reaching 14,164 on October 9
• 4th Quarter pullback stretches into 2008
• Dow closes at 12,099 on January 18 (down 8.8% in 2008)
• Dow opens 400 points down at the opening bell on January 22
• Federal funds rate cut by three quarters of a percentage point
•Resist market panic, and evaluate buy/sell decisions with your Advisor
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If a Recession is Underway, It Would Keep the Market
in Retreat But It Could Also Lead to an Investment Opportunity
Based on the 10 post-war recessions, we see that the markets could recover
relatively quickly and investors could miss the rebound with market timing.
The 10 post-war recessions have lasted a median of 10 months
Average Performance Before, During & After recession
20%
14.4%
15%
Average & Median Performance from
S&P500 Low During Recession (i.e. Rebound)
40%
35%
30%
10%
25%
3.2%
5%
20%
15%
0%
-5%
10%
-4.3%
5%
-4.8%
0%
3 Months
-10%
Year Leading
to Recession
Six Months
After
Recession
Begins
Year After
Recession
Begins
Year After
Recession
Ends
6 Months
Average
9 Months
12 Months
Median
Source: Ned Davis Research; S& P 500 Index returns based 10 post-war recessions, “Recession Could Lead to Table Pounding Buy”, January 14, 2008
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The Stock Market Delivers Over the Long-term
• From 1966 through 2005, the S&P 500 has returned an average of 10.53%
• However, the returns received each year varied greatly, from –26% to +37%
Source: Ibbotson Associates, SEI
S&P 500 Annual Returns
(1968-2007)
0
Below -20% -20% to -10%
2002
1974
2001
1973
1966
-10% to 0
2000
1990
1981
1977
1969
0 to +10%
2007
2005
1994
1993
1992
1987
1984
1978
1970
+10% to +20% Over +20%
2006
2004
1988
1986
1979
1976
1972
1971
1968
1985
1983
1982
1980
1975
1967
2003
1999
1998
1997
1996
1995
1991
1989
The indices illustrated herein are unmanaged indices. You cannot invest directly in an index. Index returns do not reflect the impact of any management fees,
transactions costs, or expenses. The information seen is for illustrative purposes only and are not reflective of the performance of any SEI funds. Past
performance is no guarantee of future results.
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Market Timing:
Moving In and Out of Cash During Volatile Times Can Be Costly
Investment Period
Average Annual Total Return
Fully Invested (2,519 days)
5.89%
Minus 10 Best Days
1.91%
Minus 20 Best Days
-0.82%
Minus 30 Best Days
-3.23%
Minus 40 Best Days
-5.25%
Treasuries*
2.65%
Source: S & P 500 Index: 01/01/98 to12/31/07
* Lehman US Short Treasury Bills
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Asset Class Returns Vary Throughout Time
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Managing Volatility through Diversification
A broad set of asset classes helps to smooth out volatility and
cushion market declines. During the stock market’s rocky 4th
quarter, some asset classes had positive returns:
Stocks - as measured by the S & P 500
Bonds - Lehman US Aggregate
Treasuries - Lehman 1-3 Gov’t Bond
- 3.3%
+ 3.0%
+ 2.3%
This trend continued during the first three weeks of 2008:
Stocks - as measured by the S & P 500
Bonds - Lehman US Aggregate
Treasuries - Lehman 1-3 Gov’t Bond
- 9.7%
+ 1.7%
+ 1.3%
Use a balanced approach to investing
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Investors Should Benefit from a Long Term and Diversified
Exposure to the Broad Markets
• Natural oscillation between fear and greed may lead to sub-optimal portfolio decisions
•
The credit market has suffered regardless of fundamentals; many managers see a lot of
under-valued credits; while still in full swing, the credit crisis is showing signs of mending
•
Fears of a slowdown in global growth may be exaggerated
– Overall global growth remains as strong as it has been in the last 25 years.
Emerging market economies now make up 50% of the world’s GDP and about 75% of
the world’s recent growth. Emerging markets could continue to grow since they are still
in the middle of a productivity revolution i.e. investing in their own infrastructure and
running significant current account surpluses
•
We live in a world of cycles (economic, market and investors sentiment) that should lead
to viable investment opportunities
•
A well diversified asset allocation can weather turbulent times
•
Experienced managers understand that we live in a world of cycles; they don’t panic and
maintain their discipline; they look for opportunities where others see uncertainty and
fear; they’re humble; they re-assess their positioning as new data becomes available.
•
Investors should focus on their long term goals and try not to give into the natural
inclination toward greed and fear.
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The Disciplined Investment Approach
A Simple Six-Step Process
1. Asset Allocation: Design a customized portfolio based on your personal
objectives, time horizon and risk tolerance.
2. Portfolio Structure: Diversify across asset classes and market sectors
to maximize returns and moderate risk.
3. Tax Management: Increase your investment returns by reducing taxes.
4. Specialist Managers: Take advantage of the expertise provided by money
managers who specialize in specific areas of the market.
5. Portfolio Management: Monitor your portfolio on a regular basis
to evaluate manager performance and rebalance as necessary.
6. Consult with Me: Review your progress and discuss any changes in your
objectives, time horizon or risk tolerance to maintain your strategic positioning.
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Asset Allocation is the Primary Determinant
of Total Portfolio Return
Security Selection 4.6%
Market Timing 1.8%
Other 2.1%
Asset Allocation
91.5%
Source: Brinson, Singer, and Beebower (1991)
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The Benefits of a Systematic Investment Approach
Identify Client Objectives
Identify Relevant Risks
Identify Appropriate Portfolios
Structured
Efficient
Manager
Continuous
Tax
Asset
Portfolio
Selection
Portfolio
Management
Allocation
Construction
Monitoring
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Staying the Course:
What You Can Expect from Me
As your advisor, it is my responsibility to:
• Help you assess and re-assess your risk tolerance throughout time
• Guide you in making decisions to meet your individual goals
• Design the optimal portfolio structure based on your objectives,
time frames and risk tolerance
• Continuously monitor your portfolio performance
• Provide you with regular reporting statements
• Keep you abreast of any additional opportunities to improve
your chances of achieving financial success
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Where Do We Go from Here?
• Nobody has a crystal ball and we can’t predict the market
• We can ensure that we are implementing the best possible strategy
• Recent events remind us of the need to re-assess you risk tolerance as well as
review and rebalance your portfolio structure to maintain your strategic
positioning
• Decisions and alternatives also need to be weighed within
the context of the broader economic landscape
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Disclosure Information
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. This information is for educational purposes only.
Index returns are for illustrative purposes only and do not represent actual fund
performance. Index performance returns do not reflect any management fees,
transaction costs or expenses. Indexes are unmanaged and one cannot invest
directly in an index. Past performance does not guarantee future results.
To determine if the fund(s) are an appropriate investment for you, carefully
consider the fund’s investment objectives, risk factors and charges and expenses
before investing. This and other information can be found in the Fund’s prospectus,
which may be obtained by calling 1-800-DIAL-SEI. Please read it carefully before
investing.
There are risks involved with investing, including loss of principal.
SEI Investments Management Corporation is the adviser to the SEI funds, which
are distributed by SEI Investments Distribution Co (SIDCO). SIMC and SIDCO are
wholly owned subsidiaries of SEI Investments Company.
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