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How SEI Emerging Markets Equity Fund successfully manages a 550-name portfolio
10/23/2017 1:50:44 AM
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THE FUND INSIDE
Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.



By Olev Edur  | Thursday, October 12, 2017


 

For those seeking access to mounting growth in the developing world, the SEI Emerging Markets Equity Fund is worth a second look. Its recent returns have outpaced the benchmark. And its 550-name portfolio certainly ensures diversification. I caught up with Sandra Ackerman-Schaufler, senior portfolio manager at SEI, to get her take on how she manages such a vast number of holdings.

Based in Oaks, Pennsylvania, SEI Investment Management employs an atypical (for mutual funds) sub-advisory structure to handle the load. Ackerman-Schaufler leads a team of equity analysts as well as a team dedicated to selecting and combining specialist investment managers (sub-advisors).

The home team selects and directs who does what, and security selection is done by each of the sub-advisors .

“It starts with the fund thesis,” says Ackerman-Schaufler. “We look at how to tackle the market: Which types of inefficiencies exist, and how to best exploit them. Emerging markets is not a stable universe – the benchmark is quite different now than in the 1990s. There are new countries, for example, and a higher concentration of large-caps.

“We choose managers that are best in class at exploiting those inefficiencies,” Ackerman-Schaufler says. “Those managing their respective sleeves may be top-down or bottom-up, quantitative or fundamental – it doesn’t matter. Different styles go in and out of favor. If we see one style start to benefit, we might allocate more resources to that manager, and if we foresee difficulties, we might allocate less. But all our sub-advisors are chosen for their skill and their approach, and they all have mandates based on need needs of their clients.”

Ackerman-Schaufler currently works with seven managers. “We try to be forward-looking, and since the next generation of emerging markets tends to be very unexploited and inefficient, we last added a specialist in frontier markets,” she says.

The resulting portfolio is effectively a blend of seven customizable sub-portfolios covering emerging and frontier (next-generation) markets. Geographically, two thirds of the portfolio is invested in Asia, with another 14% in Latin America, 11.3% in Europe, and 5.4% in Africa and the Middle East.

The fund is currently heavily weighted to technology (27.3%) and to financial services (24.7%). “Investors have traditionally associated emerging markets with commodities and infrastructure,” says Ackerman-Schaufler. “But today, the MSCI Emerging Markets Index is dominated by the information technology and financial sectors.”

Recent performance reflects this mix, with the fund posting a year-to-date return (to Sept. 30) of 20.2% compared with 17.8% for the Dow Jones Emerging Markets Total Return Index. For the 12 months ending Sept. 30, the fund returned 17.1% compared with 16.0% for the benchmark index.

“Financials are a very localized market,” says Ackerman-Schaufler. “There have been recent concerns about China’s banking sector, for example, but it’s a different story in Mexico or India. It depends on locality. But one commonality is that the financial markets in emerging nations are underdeveloped and underpenetrated.

“Technology is by comparison a much more global trend,” Ackerman-Schaufler says, adding that multinational technology companies such as Tencent Holdings, Samsung Electronics, Alibaba Group, and Taiwan Semiconductor are currently among the fund’s top holdings.

Looking down the road, Ackerman-Schaufler also sees education as a growth industry in developing nations. “China, for instance, has a strong national interest in education, and it’s a very competitive market,” she says. “Parents spend enormous sums to give their children a competitive education. There are competitive examinations for the best kindergarten spots, for example, and tutoring is in high demand. There aren’t many companies and valuations are rich, but that goes to the theme of education, and the tremendous amounts being spent on children in China. It’s crucial in Brazil too, and India, although India doesn’t have any good companies yet.”

As for frontier potential, Ackerman-Schaufler cites Vietnam as well as Argentina: “We have a healthy exposure to Argentina. They’ve had problems, but it’s not a question of if, but rather when, their status is upgraded. It may be next year or two from now. Vietnam is interesting – it has industrialization and urbanization, but doesn’t have a vast number of companies. We want to be there when that market starts growing.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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