Stock funds: Beta blockers calm nerves, boost returns

Avoiding market beta might be one of the surest ways to dampen portfolio volatility, but investors should be mindful of tradeoffs such as missing out on major market rallies. Over the long haul, however, a heavier allocation to low-beta defensive sectors like consumer staples, health care and utilities is likely to compound for a more stable rate of return. That's the message and the strategy that has proven itself through a few of SEI's managed volatility products, including U.S. Managed Volatility Ticker:(SVOAX), Global Managed Volatility Ticker:(SVTAX), and Tax-Managed Volatility Ticker:(TMMAX). “The 15-year trend of falling interest rates is over and as a result markets and economic cycles will spin more quickly, and that's exactly the kind of environment where these kinds of strategies can excel,” said Greg McIntire, who oversees management of the $472 million U.S. Managed Volatility Fund. All three of the funds are run in a manager of managers format, meaning SEI selects subadvisers to manage slices of the portfolio independently on a separate account basis. In the case of Mr. McIntire's fund, those underlying managers include Analytic Investors, Aronson Johnson Ortiz LP, and LSV Asset Management LP. Each of the underlying quantitative managers is mandated to generate 20% less volatility than the benchmark but at least to match the benchmark's performance. “The idea is that the portfolio should compound to provide a competitive return,” Mr. McIntire said. This year through August, the fund gained 5%, which compares to a 2.5% decline by the benchmark Russell 3000 Index over the same period. Of course in 2009, when the index gained 28%, the fund lagged with a gain of 16% because it was not loaded up with higher-beta sectors like technology and biotechnology. “Recent market volatility has reminded investors that the rate of return required to recoup a loss is always greater than the loss itself,” said Kevin Crowe, head of product development for the SEI Advisor Network. “To recover from a 20% loss, an investor needs a 25% gain to break even,” he added. “Limiting losses, even by one or two percentage points, can make a significant difference in the ultimate value of a portfolio.” Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.