By: Joel Chernoff, Pensions & Investments
Published: December 25, 2006

Everyone head to the cafeteria, SEI is serving up a “free lunch”!  The firm has introduced a new strategy that forsakes higher volatility stocks in favour of their lower volatility brethren.  It’s tasty and doesn’t give you heartburn according to the firm.  As you might guess, the strategy underperforms the index in a bull market and out-performs in a bear market.  (A quick check of the publicly-traded version of the strategy (NASDAQ: SVOAX) reveals that it did indeed outperform the S&P500 during the flat market of 2005 and has trailed it since the S&P500 woke up in late 2005.)

But if this sounds a lot like simply de-levering the index, read on.  SEI cites new research that shows the long-term growth of its low-vol equity subset beats the return of the index as a whole (see February 2006 research from Columbia University corroborating this theory).  In a twist that is sure to make Fama & French happy, SEI argues that low-vol (value) stocks out-perform high vol (growth) stocks over the long term.  If this is in fact true then institutions, says SEI, can plough more money into equities without the incurring their unpleasant side effects (volatility).

Some, including one of the sub-advisors itself, question whether institutions will actually order the free lunch from Chez SEI.  SEI itself suggests that the strategy’s large active bets might be scaring off potential investors.  Says P&I:

“The domestic portfolio has half of its assets in midcap stocks, those between $2 billion and $5 billion in capitalization. That compares with less than 10% for the Russell 1000 index, Mr. (James) Martielli, (senior portfolio manager at SEI) said.

“Similarly, the global version has about a 30% weighting in U.S. stocks, compared with a roughly 50% weighting for the Morgan Stanley Capital International World index.

“Those gaping discrepancies are why many investors might not be ready to embrace these strategies. ‘This is definitely not for everybody, no question,’ Mr. Martielli said.”

So while this meal may not contain the recommended daily allowance of several common nutrients, SEI wants to treat you to something a little special.

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