Managing Risks in a

Multi-Asset, Multi-Manager Portfolio

Presented by:
Mary Jane Bobyock, CFA, Director, Advisory Team
Rob Ludwig, Managing Director, Risk Management Group
Risk management at multiple levels

Client Strategic Risk Management

FUNDS

MANAGERS

SECURITIES

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Risk management analysis at multiple levels
Manager Level Analysis
Metric Description Frequency
Security Level Holdings Analysis Access to portfolio holdings Daily
Tracking error Aggregates risk from all active exposures relative to a benchmark Weekly
Manager contribution to risk Measures how the active risk budget is allocated Weekly
Manager risk-adjusted return Provides an objective measure of manager alpha Monthly

Portfolio Level Analysis

Metric Description Frequency
VaR model integrity Compare manager return forecast with results Daily
Portfolio benchmark-relative Controls tracking error by setting limits on relative exposures Daily
exposure guidelines
Counterparty risk Monitors exposure to dealers from OTC derivative transactions Daily
Relative value at risk Identifies excessive risk-taking relative to benchmark Daily
Cover Measures the amount of capital in excess of the liabilities created Daily
by derivative exposures
Tracking error Aggregates risk from all active exposures relative to a benchmark Weekly
Stress testing Uses stress scenarios to identify non-linear behavior Monthly
This chart illustrates the type and frequency of reports and analysis that SEI has available to monitor risk at the manager and portfolio level. Specific risk management protocols may
vary depending on the manager or portfolio and may be customized for particular clients.

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Portfolio design:
Strategic alpha source allocation
SEI establishes relative return and
risk expectations for the portfolio over
the medium and long term in a
Portfolio Thesis
The Thesis identifies which alpha
sources will be included and their
long-term strategic allocation
Through allocations to differentiated
managers, SEI seeks to construct
portfolios with lower relative risk than
the individual underlying investment
Target Tracking Alpha Target risk
managers
Manager/portfolio
Weight error source contribution
Alpha is additive while volatility
Manager 1 30% 5.0%
Risk
25% (tracking error) can be dampened
Premium
through diversification (lowly
Manager 2 35% 4.0% Selection 25% correlated alpha sources)
Manager 3 15% 8.5% Momentum 25% Strategic allocations provide a
Manager 4 20% 6.5% Macro 25%
framework for active manager
allocation or sizing
Portfolio 100% 3.0% 100% 100%

For illustrative purposes only

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Manager contribution to risk
Prevent one managers performance from dominating fund performance
Control fund level risk by limiting manager percentage contribution to total risk
Manager risk contribution determined by volatility and correlation to other managers

Risk Limit

For illustrative purposes only.

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 Internal oversight and state-of-the-art risk management tools
provide continuous management of risks at all levels
SEI Investment Management Unit Our ISO Committee provides
independent review and oversight
of all investment decisions
Investment
Strategy Oversight We have made a significant
Risk Management Portfolio Strategy investment in an enterprise risk
Committee
(ISO) management system to proactively
monitor risk across asset classes
and the total client portfolio
Well-defined policies and
procedures enforce discipline to
Investment defined risk parameters
Strategy Processes prevent a single
manager from dominating the risk
of a multi-manager portfolio
Stress testing is used to reveal
non-linear behavior from large
Equities Fixed Income Alternatives changes to risk factor

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Risk management for multi-asset portfolios
Asset allocation strategy is designed to achieve long-term client objectives
Uses long-term risk, return and correlation forecasts
Asset allocation is relatively static

Implementation with active management seeks to add excess return or lower risk
over shorter-term horizons
Active security selection creates dynamic exposures
Dynamic asset allocation creates deviations from long-term policy
Asset class correlations are not static

Risk management monitors that the active implementation supports the long-term
asset allocation strategy

7
Risk model explains the variability of individual security
returns in terms of systematic factors

Equity Factors Fixed Income Factors

Market risk Yield curve (by country)
Country Credit spreads (by country, industry)
Over 2,000 risk factors
Industry Foreign exchange
Style factors Inflation Factor model creates an
Fundamental factors intuitive view of risk

Alternatives Factors Factor model reduces the

Hedge Funds Real Estate Private Equity
number of parameter
estimates and improves
Equity market risk Property type Deal type robustness
Equity sectors Leverage Size
Country Geography Stage
Yield curve Vintage
Credit Concentration
Commodities Geography
Currency
Style

8
Correlation matrix of risk factors

Multi-asset risk management system provides an integrated view across

equities, fixed income and alternatives

Risk Factors

Equities
Risk Factors

Fixed
Income

Alternatives

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Correlation matrix of risk factors

Multi-asset risk management system provides an integrated view across

equities, fixed income and alternatives

Risk Factors

Equities Equities
Fixed
Risk Factors

Equities Fixed
Fixed Income

Alternatives

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Correlation matrix of risk factors

Multi-asset risk management system provides an integrated view across

equities, fixed income and alternatives

Risk Factors

Equities Equities
Fixed
Risk Factors

Equities Fixed Fixed

Fixed Income Alternatives

Fixed Alternatives
Alternatives

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Correlation matrix of risk factors

Multi-asset risk management system provides an integrated view across

equities, fixed income and alternatives

Risk Factors

Equities Equities Equities

Fixed Alternatives
Risk Factors

Equities Fixed Fixed

Fixed Income Alternatives

Equities Fixed Alternatives

Alternatives Alternatives

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Calculating portfolio risk with a factor model
Contribution to risk of each security We can aggregate securities to
is determined by: calculate:

Weight of each security in the portfolio Contribution to risk from each factor

Exposure of each security to each risk Contribution to risk from each manager
factor

Covariance matrix of the risk factors Contribution to risk from each asset class

Total portfolio risk

Tracking error relative to benchmark

13
U.S. Managed Volatility Strategy:
Contribution to risk by factor

Risk Group Risk Contribution (%)

Equity Risk 9.41
Market Risk 10.74
Volatility -1.62
Momentum -0.01
Size 0.11
Value 0.10
Liquidity 0.17
Growth 0.03
Dividend Yield -0.06
Other Factors -0.05
Foreign Exchange 0.06
Total 9.47%

Information as of 4/30/2014.

14
 Risk decomposition of moderate volatility hedge fund

Spread Risk Decomposition

Risk Contribution
Total Risk Decomposition Risk Group
(%)
Risk Contribution Hedge Fund - Spreads
Risk Group
(%) ABS 0.01
Hedge Fund Equity 3.47 Commercial Mortgage 0.13
Hedge Fund Spreads 1.29 Corporate Credit 0.45
Hedge Fund Rates 0.11 Residential Mortgage 0.36
Hedge Fund Style 0.07 Capital Structure Loans 0.0
Total 4.94% U.S. Credit 0.34
Total 1.29%

Information as of 4/30/2014.

15
Actual portfolio implementation reflects active view and
current market conditions

Strategic asset allocation for a Risk decomposition of a sample client

sample client portfolio portfolio implementation
Asset Class Allocation (%) Risk Group Risk Contribution (%)
Global Equities 40 Equity 4.84
Fixed Income 26 Alternative 1.34
Inflation-Sensitive 9 Foreign Exchange 0.31
Hedge Funds 10 Spreads 0.30
Real Assets 10 Inflation 0.02
Dynamic Allocation 5 Rates -0.02

Expected Risk 12.5% Total Risk 6.8%

16
Current environment: Volatility is low

17
Total portfolio exposures to higher yielding fixed
income sectors in sample client portfolio

High Yield Corporate

Bank Loans

Non-Agency Mortgages

CMBS

CDO / CLO

0% 2% 4% 6%
Portfolio Exposure

18
Stress testing exposures to higher yielding fixed income
sectors in sample client portfolio

One Sigma Shock to High Yield Credit Spreads*

Factor Shock
High yield spreads +70 bps
U.S. Treasury 10 year rate -31 bps
Investment grade spreads +20 bps
VIX +6.4%
S&P 500 -7.3%
World equity ex-U.S. -9.3%

*Implied shocks to other risk factors based on correlation matrix.

19
Stress test results for high yield credit shock on sample
client portfolio

Total Return Impact

Equity Market Exposure

Alternatives / Credit

-6 -5 -4 -3 -2 -1 0
Return Impact (%)

20
Portfolio comparison
Diversified Portfolio
80/20 Passive Portfolio
Private Assets 5.0% Large Cap 9.0%
Structured Credit 5.0%
Barclays Aggregate
20.0% S&P 500 Index 7.0%
Core Prop 7.0%

Extended Markets Index

3.0%
Small Cap 2.0%
Special Sits 8.0%

World Equity ex-US

12.0%
MARR 8.0%

Oppt Income 3.0% EM Equity 3.0%

Barclays Aggregate 0
S&P 500 Index DAA 5.0%
80.0% US Core Fixed 10.0%
High Yield 7.0%
EM Debt 6.0%

80/20 Passive Portfolio Diversified Portfolio

Compound Return 6.6% 8.0%
Risk 15.6% 12.5%
Sharpe Ratio 0.29 0.47
Poor Scenario Return -15.9% -10.6%
*Gross of Fees
Illustrations shown are based on capital market assumptions; see disclosure at end of presentation for additional details

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 VAR Analysis of $100 million portfolio May 31, 2014
Undiversified Risk

Diversified Risk

Alternative

Inflation

FX

Interest Rates

Spread

Equity

$- $1,000,000.00 $2,000,000.00 $3,000,000.00 $4,000,000.00 $5,000,000.00 $6,000,000.00 $7,000,000.00 $8,000,000.00 $9,000,000.00 $10,000,000.00

$5,000,000.00
$-
$(5,000,000.00)
$(10,000,000.00)
$(15,000,000.00)
$(20,000,000.00)
$(25,000,000.00)
1% 10 Yr Treas Hypothetical Inflation Fed Tapering Tech Bubble -10% Equity VIX jumps to 35

80/20 Passive Portfolio Diversified Portfolio

Source: Blackrock Portfolio Risk Tools, SEI Investment Management Unit.

Risk defined as standard deviation.

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Dont try this at home

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Important Information
This presentation is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned
subsidiary of SEI Investments Company. The material included herein is based on the views of SIMC. Statements that are not factual in
nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute
only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a
guarantee of future results. This presentation should not be relied upon by the reader as research or investment advice (unless SIMC
has otherwise separately entered into a written agreement for the provision of investment advice).
There are risks involved with investing including loss of principal. There is no assurance that the objectives of any strategy or fund will
be achieved or will be successful. No investment strategy, including diversification, can protect against market risk or loss. Current
and future portfolio holdings are subject to risk. Past performance does not guarantee future results.
For those SEI funds which employ a multi-manager structure, SIMC is responsible for overseeing the sub-advisers and recommending
their hiring, termination, and replacement. References to specific securities, if any, are provided solely to illustrate SIMCs investment
advisory services and do not constitute an offer or recommendation to buy, sell or hold such securities.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which
in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its
affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been
independently verified by SEI.

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Important Information
SIMC develops forward-looking, long-term capital market assumptions for risk, return, and correlations for a variety of global asset
classes, interest rates, and inflation. These assumptions are created using a combination of historical analysis, current market
environment assessment and by applying our own judgment. In certain cases, alpha and tracking error estimates for a particular asset
class are also factored into the assumptions. We believe this approach is less biased than using pure historical data, which is often
biased by a particular time period or event.
The asset class assumptions are aggregated into a diversified portfolio, so that each portfolio can then be simulated through time using
a monte-carlo simulation approach. This approach enables us to develop scenarios across a wide variety of market environments so
that we can educate our clients with regard to the potential impact of market variability over time. Ultimately, the value of these
assumptions is not in their accuracy as point estimates, but in their ability to capture relevant relationships and changes in those
relationships as a function of economic and market influences.
The projections or other scenarios in this presentation are purely hypothetical and do not represent all possible outcomes. They do not
reflect actual investment results and are not guarantees of future results. All opinions and estimates provided herein, including forecast
of returns, reflect our judgment on the date of this report and are subject to change without notice. These opinions and analyses
involve a number of assumptions which may not prove valid. The performance numbers are not necessarily indicative of the results you
would obtain as a client of SIMC.
We believe our approach enables our clients to make more informed decisions related to the selection of their investment strategies.
For more information on how SIMC develops capital market assumptions, please refer to the SEI paper entitled Executive Summary:
Developing Capital Market Assumptions for Asset Allocation Modeling. If you would like further information on the actual assumptions
utilized, you may request them from your SEI representative.
Prepared for use at the SEI 2014 Nonprofit Client Symposium, June 19-20, 2014.

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