WAYNE, Pa. — Officials at SEI Investments Inc., Wayne, have come up with a way to invest in an equity portfolio that has the volatility of a bond portfolio.
This low-beta strategy invests across the capitalization spectrum, but is overweighted in stocks that are far less volatile than the norm, typically in such sectors as utilities, consumer staples and health care. In contrast, the strategy underweights more volatile sectors, such as technology.
As a result, investors can expect returns similar to the entire stock market, but with much less risk. The bottom line is that institutions can make higher stock-market allocations without adding unwanted volatility to their portfolios — and at typical institutional fees, well short of the hefty fees charged by hedge funds, which often have lower volatility than typical stock portfolios.
The downside: The strategy has huge tracking error relative to the benchmark, on the order of five or six percentage points. The more conservative stocks in the portfolios are likely to lag in a sharp bull market, although they are expected to outperform during a bear market.
The strategy is particularly timely as new pension accounting rules are driving pension executives to figure out how to reduce excessive swings in their portfolios.
"I think it will take off with the focus on LDI (liability-driven investing)," said Harindra de Silva, president of Analytic Investors Inc., Los Angeles, which subadvises on domestic and global equity versions of the strategy. Both are available as listed mutual funds, but Analytic also offers them as separate accounts.