Presentation on theme: "Staying the Course through Market Volatility Investor Presentation"— Presentation transcript:
1 Staying the Course through Market Volatility Investor Presentation
2 Navigating through Market Turbulence Recent market volatility has left some investors feeling uneasy about their portfoliosS&P 500 declined 10% from October 9th to November 26S&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.
3 US Equity Markets - A Wild and Bumpy Ride… 2007 S&P 500 Roller Coaster RideUS Equity Markets - A Wild and Bumpy Ride…Nov. 1st – US Financials fall 4.6%, the most since September 2002Apr. 16th – S&P 500 surged to its highest in more than six yearsAug. 9th – All 10 industry groups in the S&P 500 dropped more than 2%Feb. 27th – US stocks plunged, erasing all of 2007 gains after sell-off in China spreads and sparked the biggest rout in four yearsAug. 28th – Financial shares drive the S&P 500 down 2.4% as 487 of its members fellMarch 13th – Mortgage Bankers Association reports that delinquencies for sub-prime reached 13.33% in Q4, highest since Q203Just looking at a simple chart of the S&P 500 index, we clearly see that the market got increasingly choppy and volatile as the summer began. With information so abundant and at everyone’s fingertips, many news items throughout the year greatly effected the daily swings in the S&P Lets take a look at some interesting highlights and lowlights throughout the year as subprime and credit concerns began to take its toll on US Financials, the US economy and all corners of the market.So while the markets and investors reacted to the data coming out about subprime mortgages, financials, etc. – the media and so-called pundits contributed to this volatility as their tone seemed to changes as the months went by…Source: Bloomberg
4 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%To further put recent volatility into perspective, performance numbers through the date of presentation would also convey the message.
5 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 years1997, 1998 and 1999It is important to evaluate financial news with a trusted AdvisorThere will always be market hysteria surrounding turbulent world news and market swings, inviting Chicken Little to come out and predict that the sky is falling. But the vast amount of information available today is not always accurate. It is important to consult with your Advisor.
6 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.”Early on in 2007 people had high hopes for the year and that the mortgage concerns would not have a dramatic impact but as the year went on the tone changed and concerns mounted about the overall effect of the mortgage and credit crisis on the entire market. The tone dramatically changed…And as the tone changed throughout the year, so did the volatility of the markets and more importantly investor sentiment. Investors began to become more fearful and volatility spiked…Source: Bloomberg
7 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 predictMarket response to concern about subprime mortgages and other “recessionary” concerns:Investor panic that the economy would collapseDow drops by 416 points on February 27Biggest one-day fall since the 9/11 attacksDow then reaches a record high of 13,633 on May 30Breaks record 4 more times, reaching 14,164 on October 94th Quarter pullback stretches into 2008Dow closes at 12,099 on January 18 (down 8.8% in 2008)Dow opens 400 points down at the opening bell on January 22Federal funds rate cut by three quarters of a percentage pointResist market panic, and evaluate buy/sell decisions with your AdvisorJust as many investors believed the economy would collapse after the 9/11 attacks—selling their shares at the first opportunity and causing the Dow to plunge—last year’s subprime mortgage crisis eroded investor confidence, giving the Dow its biggest one-day tumble since 9/11. But just as the Dow rebounded within a few months of the attacks, so too it bounced back in In May it reached a new milestone, broke three more records in July, and finally surpassed the 14,000 mark in October.Also consider the “Guess Right Ratio” (Dalbar, Inc) , an indicator of when the average investor correctly “quesses” the direction of the market. The Guess Right Ratio is strongest during periods of rising markets (1992, and ), but investors make the most mistakes after the market downturns (1988, 1989, 2002). These mistakes are often made because investors are driven by the fear that the market will not recover, but historically the market does recover.
8 If a Recession is Underway, It Would Keep the Market in Retreat But It Could Also Lead to an Investment OpportunityBased 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 monthsAverage Performance Before, During & After recessionAverage & Median Performance fromS&P500 Low During Recession (i.e. Rebound)The above slide shows equity market performance before, during and after a recession. Ultimately, recessions are not a bad thing they help to flush out the excesses that exist during protracted bull market periods and eventually lead to higher than normal returns after the recession comes to an end.No one has a crystal ball to predict when a recession is going to hit, but we can take lessons from the past which indicate that the worst time to move money out of equity markets is after a recession has already taken grip.Instead investors should rely on the decisions they have already made regarding their investment strategy by relying on sound, diversified asset allocation decisions.Yes, equity market performance suffers around a recession, but...Recessions aren’t the end of the world – equity markets tend to perform well more than 12 months after they officially startKeep in mind, we don’t get “official” word of the recession start date until The National Bureau of Economic Research proclaims one several months if not years later.Source: Ned Davis Research; S& P 500 Index returns based 10 post-war recessions, “Recession Could Lead to Table Pounding Buy”, January 14, 2008
9 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, SEIS&P 500 Annual Returns ( )Below -20% -20% to -10% % to to +10% % to +20% Over +20%2007200519941993199219871984197819702006200419881986197919761972197119682003198920001990198119771969Let’s start with an understatement: The roller coaster ride keeps rolling.Certainly we’ve been experiencing a lot of volatility in the market lately – both on a day-to-day basis and since the beginning of the bull market in the mid-1990s. But this variation in investment return has always been with us – perhaps just not as pronounced as it seems to be now.For example – Let’s look over the past forty years, from 1966 to 2005, which covered two complete bull and bear markets. During this period the S&P 500 has provided an average annual rate of return of over 10%. But that’s only an average. Remember the bulls and bears in that time period. What have the individual year-by-year numbers looked like?This chart illustrates the annual ranges of return for the S&P Note that over this 40-year period, many of the years have been far from the average. So in that sense, what we’ve been going through recently could be characterized as “business as usual” for the long-term investor, not a harbinger of disaster.20011973196620021974The 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.
10 Market Timing: Moving In and Out of Cash During Volatile Times Can Be Costly Investment PeriodAverage Annual Total ReturnFully Invested (2,519 days)5.89%Minus 10 Best Days1.91%Minus 20 Best Days-0.82%Minus 30 Best Days-3.23%Minus 40 Best Days-5.25%Moving to cash during volatile times is not always as safe as it seems.My experience has been that many retail investors try to “time” the market by getting out during bad times and waiting for the good times to return. But as you can see, if your timing is off by even a small factor, and you miss any of the best days, it can really hurt.(read slide)So if in this 10+ year period you picked the wrong 40 days to be out of the market - less than 1% of the total time - you penalized yourself by losing your entire return and much more. That’s a big loss for a small error.Treasuries*2.65%Source: S & P 500 Index: 01/01/98 to12/31/07* Lehman US Short Treasury Bills
13 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 %Bonds - Lehman US Aggregate %Treasuries - Lehman 1-3 Gov’t Bond %This trend continued during the first three weeks of 2008:Stocks - as measured by the S & P %Bonds - Lehman US Aggregate %Treasuries - Lehman 1-3 Gov’t Bond %Use a balanced approach to investing
14 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 decisionsThe 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 mendingFears 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 surplusesWe live in a world of cycles (economic, market and investors sentiment) that should lead to viable investment opportunitiesA well diversified asset allocation can weather turbulent timesSEI’s experienced managers understand that we live in a world of cycles; they don’t panicand maintain their discipline; they look for opportunities where others see uncertainty andfear; 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 inclinationtoward greed and fear.
15 The Disciplined Investment Approach A Simple Six-Step ProcessAsset Allocation: Design a customized portfolio based on your personal objectives, time horizon and risk tolerance.Portfolio Structure: Diversify across asset classes and market sectors to maximize returns and moderate risk.Tax Management: Increase your investment returns by reducing taxes.Specialist Managers: Take advantage of the expertise provided by money managers who specialize in specific areas of the market.Portfolio Management: Monitor your portfolio on a regular basis to evaluate manager performance and rebalance as necessary.Consult with Your Financial Advisor: Review your progress with an objective professional, and discuss any changes in your objectives, time horizon or risk tolerance to maintain your strategic positioning.Following this systematic, time-tested process will enable us to make clear, well-informed decisions regarding your investment plan. Our goal is to maximize your upside potential while minimizing your risk exposure.1. Asset Allocation: One of the most important steps in the process is deciding how to allocate investments among broad asset classes such as such as stocks, bonds, real estate and cash. This allocation is based on your desire for growth vs income, time horizon for achieving your goals, and risk tolerance (i.e. your comfort level and willingness to experience market fluctuations).Portfolio Structure: Even within the asset classes, there are a number and variety of investment choices. Stock holdings for example, can be further diversified across market sectors (utilities, energy, retail, telecommunications etc.) as well as sub-asset classes (large vs. small cap, growth vs. value). Optimal portfolio structure therefore, reflects several layers of diversification.Tax Management: At the end of the day, it’s not the money you earn – it’s what you keep. Taxes can erode returns, if not properly managed, so managing tax exposure is an important part of the process.Specialist Managers: The multitude of investments available today requires taking advantage of managers who specialize in specific areas of the market and know where to seek opportunities.Portfolio Management: Natural market movements often cause portfolio allocations to “drift” from their original positions as different sectors of the market appreciate or depreciate over time. These changes in valuations create the need to systematically rebalance on a regular basis.
16 Asset Allocation is the Primary Determinant of Total Portfolio Return Security Selection 4.6%Market Timing 1.8%Other 2.1%Asset Allocation91.5%A disciplined investment process moderates the risks inherent to investor behavior and provides a scientific approach designed to achieve goals and strategic objectives. Research has shown that the asset allocation decision, or how your investments are diversified among multiple asset classes such as stocks, bonds and cash, has by far the most significant impact on overall investment performance. As illustrated here, over 90% of the variation in returns is due to the asset allocation of investments in a portfolio. This is why determining the right asset allocation for you is critical to your investment success.Source: Brinson, Singer, and Beebower (1991)
17 The Benefits of a Systematic Investment Approach Identify Client ObjectivesIdentify Relevant RisksIdentify Appropriate PortfoliosStructuredAssetAllocationEfficientPortfolioConstructionManagerSelectionContinuousPortfolioMonitoringTaxManagement
18 Staying the Course: What You Can Expect from Me SEI InvestmentsStaying the Course: What You Can Expect from MeAs your advisor, it is my responsibility to:Help you assess and re-assess your risk tolerance throughout timeGuide you in making decisions to meet your individual goalsDesign the optimal portfolio structure based on your objectives, time frames and risk toleranceContinuously monitor your portfolio performanceProvide you with regular reporting statementsKeep you abreast of any additional opportunities to improve your chances of achieving financial successSome of you may already be using the services of a professional investment advisor, and some of you may be considering employing one going forward.But we should still address the question, “What should you expect from a professional investment advisor?”(Read bullets)Now, let’s explore the institutional investment process.24
19 Where Do We Go from Here?Nobody has a crystal ball and we can’t predict the marketWe can ensure that we are implementing the best possible strategyRecent 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 positioningDecisions and alternatives also need to be weighed within the context of the broader economic landscape
20 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 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.