Knowledge Center Archive
August 2012 Market and Performance Update
- Summer holidays ensured a quiet August as market activity and trading volumes slowed.
- Volatility dipped to levels unseen for several years as investors waited for further policy actions.
- Global equities and bonds both gained in August, with riskier assets coming back into favor.
Leading central banks remained accommodative in August as part of ongoing efforts to stimulate global growth. The European Central Bank (ECB) left eurozone interest rates at 0.75% and maintained the deposit rate for banks placing money with it at 0% to help boost liquidity. The Bank of England voted to maintain interest rates at the historic low of 0.50% once again in August, after the committee acknowledged the need for further stimulus measures in the U.K. (after agreeing to expand the scope of its asset purchase program by a further £50 billion at the July meeting). Continued talk surrounding plans for the ECB to buy short-term government debt boosted sentiment, while U.S. Federal Reserve Chairman Bernanke’s speech further bolstered confidence that those in charge of the developed world’s central banks will take the necessary steps to support the global economy.
For the eurozone as a whole, economic data released during the month once again painted a fairly depressing picture as the region’s overall growth rate was estimated to have turned negative in the second quarter of 2012. The near-term outlook for the eurozone economy has become more uncertain, partly due to a weaker global backdrop. Manufacturing data remained subdued, the euro area unemployment rate hit a new record high of 11.2% and the region’s retail sales were flat for the month. On a more positive note, eurozone inflation remained steady for the third consecutive month at 2.4% in August.
The U.K. witnessed another series of lackluster economic data releases in August. The construction sector rebounded after contracting slightly in June, while the service sector continued to grow, albeit at a somewhat sluggish pace. Manufacturing, on the other hand, went from a bad June to an even worse July, shrinking by its largest margin since mid-2009. Consumer confidence was unchanged in August and continues to hover only slightly above the lows set in late 2011. Signs the consumer is pulling back are appearing, as evidenced by the July retail sales report (excluding auto fuel) which revealed no growth in spending. The employment picture did offer one bright spot, as the three-month unemployment rate ending in June ticked lower to 8.0% from 8.1%. The second (preliminary) reading of second-quarter gross domestic product growth also showed relative improvement, with an economic contraction of 0.5%. While the U.K. remains in a recession, the preliminary numbers are better than the advanced reading from July that estimated the quarterly contraction to be 0.7%.
U.S. economic data, although mixed, showed some encouraging signs. Labor markets showed continuing (but still painfully slow) improvement. Retail sales beat the consensus estimate by rising 0.8% in July, the sharpest monthly increase since March. The housing sector continued to show strength, albeit from depressed levels. However, manufacturing data signaled contraction for the second month in a row. Consumer inflation held steady in July, undershooting market expectations of a 0.2% increase. Investors paid close attention to signals from the Federal Open Market Committee as well as Federal Reserve Chairman Ben Bernanke’s speech at the Fed’s annual conference in Jackson Hole, Wyoming. While no explicit actions were promised, Bernanke gave assurances that the Fed could and would do more if needed.
Government bond yields for the U.S., Germany, the U.K. and other developed countries remained largely unchanged from the end of July. Price increases witnessed at the start of August petered out mid-month as a result of reduced market activity due to traders taking time off for summer holidays. The bond markets of emerging countries showed good performance in August, with strong fundamentals and inflows of new money. High-yield bonds also performed well.
The prospect of further stimulus and supportive measures by key central banks helped stock markets rise in August. This was particularly the case for European equity markets, which were among the world’s best performing for the month. Spain, Greece and Italy did particularly well and generated double digit returns in U.S. dollar terms. Within the MSCI AC World Index, most sectors were positive, with only Utilities in negative territory for the month. Information Technology, Consumer Discretionary, Financials and Energy performed best in August.
Index Data for August
- The Dow Jones Industrial Average index returned 1.04%.
- The S&P 500 Index climbed 2.25%.
- The NASDAQ Composite Index returned 4.55%.
- The MSCI AC World Index, used to gauge global equity performance, gained 2.17%.
- The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.86%.
- The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index”, moved from 18.93 to 17.47, but went as low as 13.45 on August 17.
- WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $88.06 a barrel at the end of July to $96.47 by August 31.
- The U.S. dollar weakened against the euro and sterling, but strengthened marginally against the Japanese yen. The euro strengthened against most major currencies. The U.S. dollar ended August at $1.59 against sterling, $1.26 versus the euro and at 78.30 yen.
The environment for active equities in August was quite favorable and a welcome departure from the three previous months of risk-off and safety orientation. Europe continued to make progress in resolving its financial crisis, though more work remains to be done. For large-cap equity, stock selection within Energy and consumer-oriented sectors was the greatest contributor to relative performance, while the positive impact of an Information Technology overweight was mitigated by lackluster stock selection. In small-cap equity, the portfolio benefited from its underweight position in Utilities, which was the benchmark’s worst-performing sector. Impact from small-cap stock selection was disappointing, with the Industrials and Materials sectors accounting for much of the weakness. Among emerging markets holdings, most noteworthy were the strong stock selection in Consumer Discretionary and the beneficial underweight to, and strong selection in, the Materials sector.
In core fixed income, an overweight to commercial mortgage-backed securities (CMBS) contributed positively, as did an overweight to financials, but the Fund’s short-duration posture and curve-flattening position detracted from performance as intermediate and long-term Treasury yields rose. For high yield, collateralized loan obligations enhanced performance, while underweights to banks and telecommunications detracted. For international fixed-income, an underweight to covered bonds was negative but mitigated by an overweight stance to commercial mortgage-backed securities CMBS and asset-backed securities. In emerging markets fixed income, local currency issues performed poorly, but an overweight to Argentina contributed positively.
Manager Positioning and Opportunities
SEI’s portfolio managers rely on investment-manager selection and portfolio construction in an effort to deliver diversified sources of excess return for our portfolios. In large-cap equity, investment managers maintain overweights to Information Technology and Consumer Discretionary while remaining underweight Industrials, Utilities and Financials. In small-cap equity, the portfolio’s largest overweight remains Industrials, particularly in capital goods and commercial and professional services; the Utilities sector is now the largest underweight. International equity maintains an off-benchmark allocation to emerging markets and overweights to small- and mid-capitalization stocks which should benefit from a greater appetite for risk. International equity remains underweight the aging economy of Japan, although our managers are employing shrewd stock selection to uncover the pockets of strength in that country.
In investment-grade fixed income, duration was shorter than the benchmark at the end of the month given the low level of Treasury yields and negative real yields. Spread sector allocations have been and continue to be focused on the securitized sectors as they represent the greatest fundamental relative value. Within high-yield debt, an allocation to bank loans has been maintained, due to their more defensive positioning and event-driven opportunities, along with an allocation to collateralized loan obligations and underweights to the Energy and Utilities sectors. In emerging market debt, managers are overweight local currency versus dollar issues while maintaining corporate exposure and keeping duration short of the benchmark.
SEI’s models and fund of funds incorporate strategic, long-term asset allocations. Occasionally, we may hold overweight or underweight positions relative to our baseline allocations as we seek to take advantage of short-term (typically six- to 12-month) market opportunities. We no longer favor U.S. high-yield debt and other corporate credits versus U.S. Treasurys and other sovereign debt. We believe there is limited potential for capital gains in the high-yield fixed-income market at this time. Yields (which move inversely to prices) have declined towards 7% within the BofA Merrill Lynch US High Yield Master II Constrained Index, a level that historically has acted as a floor. In addition, 39% of high-yield debt within the Index now trades above its call price. In May 2011, this figure reached 44% just prior to a pronounced decline in prices, suggesting the possibility that prices could begin to fall soon. We continue to favor global investment-grade corporate debt at the expense of global government bonds.
We have removed our bias towards U.S. equities over European equities. After more than a 10% rally in the S&P 500 Index since the lows of June, U.S. equity prices have, in our view, approached the upper end of their expected near-term trading range. September is set to be a busy month in Europe, with important elections and government meetings on the calendar. It is unclear what outcome these events will have and how European equity markets will react. Given that valuations have already fallen to historically low levels and the potential for large, unpredictable swings, SEI returned to neutral on European equities versus our strategic asset allocation.
The Dow Jones Industrial Average is a widely followed market indicator based on a price-weighted average of 30 blue-chip New York Stock Exchange stocks which are selected by editors of the Wall Street Journal.
The S&P 500 Index is a capitalization-weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors
The NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on the National Association of Securities Dealers Automated Quotations (NASDAQ) system.
The MSCI All Country World Index is a market-capitalization-weighted index composed of over 2,000 companies, and is representative of the market structure of 48 developed and emerging market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars.
The Barclays Capital Global Aggregate Bond Index (formerly Lehman Brothers Global Aggregate Index), an unmanaged market-capitalization-weighted benchmark, tracks the performance of investment-grade fixed- income securities denominated in 13 currencies. The index reflects reinvestment of all distributions and changes in market prices.
The Chicago Board Options Exchange Volatility Index (VIX) tracks the expected volatility in the S&P 500 over the next 30 days. A higher number indicates greater volatility.
The BofA Merrill Lynch US High Yield Constrained Index measures the performance of a representative basket of high-yield bonds.
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 regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There is no assurance as of the date of this material that the securities mentioned remain in or out of SEI Funds.
For those SEI Funds which employ the ‘manager of managers’ structure, SEI Investments Management Corporation (SIMC) has ultimate responsibility for the investment performance of the Funds due to its responsibility to oversee the sub-advisers and recommend their hiring, termination and replacement. SIMC 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.
To determine if the Funds are an appropriate investment for you, carefully consider the investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which can be obtained by calling 1-800-DIAL-SEI. Read them carefully before investing.
There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging Markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.
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- No Bank Guarantee
- May Lose Value