Commentary: Third Quarter 2009 Market and Performance Update

Summary

• Economic improvement, rising risk appetite and low rates keep investors looking for higher returns
• Riskier segments of the stock and bond markets lead performance in the third quarter
• Spread between corporate, government bond yields back to pre-Lehman levels
• Emerging-market debt and equities rise on forecasts that these countries will likely drive global recovery

A combination of improvement in economic indicators and an increasing appetite among investors to take on additional risk continued to drive stock and bond markets higher over the third quarter. As major global central banks kept interest rates at or near historic lows, and in some cases kept a lid on yields through bond purchase programs, investors sought higher returns than what they could get from government bonds and cash deposits. This fueled strong demand for assets that were perceived to be riskier, and therefore offered potentially greater returns for taking on extra risk.

For the quarter, the Dow Jones Industrial Average gained 15.3%, the S&P 500 Index rose 15.8% and the NASDAQ Composite Index finished up 19.9%. The MSCI World AC Index rose 17.86% in the three months to the end of September, posting a cumulative gain just shy of 70% from the lows reached on March 9. In the bond markets, the Barclays Capital U.S. Aggregate Bond Index gained 3.70%. In addition, the Barclays Capital Global Aggregate Bond Index gained 6.23%, extending year-to-date gains to 18.51%, a substantial return for the typically more staid fixed-income markets.

The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” was little changed, ending the three months just shy of 26. However, volatility remained higher than its long-term average, and there continued to be large gaps between the best- and worst- performing stocks and sectors in the global equity markets over the quarter.

Stocks

As has been the case throughout the market recovery, stocks that had suffered the most during the credit crisis continued to lead the rally. This was reflected in the leadership of value stocks over growth stocks. Companies that had the highest levels of debt also strongly outperformed over the quarter, as more of these companies overcame fears that they wouldn’t be able to secure the funding they needed to remain in business. Not surprisingly in strongly rising markets, stocks with a high beta, a measure of how closely and to what extent returns track the overall market, also outperformed the index. Globally, the Financials sector topped the list in the third quarter, as it has done since the rally from the March lows. The next-best-performing sectors in the third quarter were Materials and Industrials, while the more defensive areas of Utilities and Healthcare brought up the rear.

Energy stocks also lagged the index return, as WTI Cushing crude oil prices ended the quarter just above $70, virtually unchanged from its level at the end of June. Still, that was more than double the low of near $30.00 reached in December last year.

Bonds

High-yield bonds, as measured by the Merrill Lynch US High Yield Master II Index, extended year-to-date gains to just shy of 50%, outpacing all other sectors of the global bond markets, as many companies were able to avoid defaulting on their debts.

Despite a continued deterioration in the commercial real estate market, growing appetite for risk helped commercial mortgage-backed securities (CMBS) sustain their impressive rallies as well. The sector also continued among the best-performing in the overall bond markets year to date, with gains of around 24% as measured by the Merrill Lynch CMBS Fixed Rate A-AAA Rated Index. All credit-quality segments in the index (apart from the highest AAA-rated bonds) posted gains of over 50%, as did the poorer-quality Merrill Lynch CMBS BBB-Rated Index.

Emerging-market debt, another sector considered to be among the riskiest, also continued among this year’s top performers, with year-to-date gains of over 25% in the JPMorgan EMB Global Diversified Index.

Government bonds, which would normally tend to react negatively to strengthening economic data, posted solid gains in the third quarter amid expectations that, globally, inflation pressures should remain subdued and interest rates should remain very low for the foreseeable future. Treasury yields stabilized over the quarter, but continued heavy issuance remains a market risk in the quarters ahead.

Economy

Evidence mounted during the quarter that the global economy has turned the corner from recession to recovery, and many companies reported better-than-expected quarterly results. However, some of the biggest gainers during the quarter were companies that were still showing a loss, albeit a smaller one than previously feared, or had escaped from bankruptcy for the time being.

Among the more positive developments over the quarter was a developing trend of three consecutive monthly gains in the S&P Case-Shiller Home Price Index , fanning hopes that the world’s largest economy was stabilizing. However, indicators of retail sales (by far the main driver of growth) showed a mixed picture, and after some early signs of improvement, employment data deteriorated again towards the end of the quarter. This mixed bag of economic data has confirmed our view that the economy is showing improvement but will continue to do so in fits and starts.

Other developed markets showed a potential for economic recovery. UK house prices showed sustained gains through the quarter, although the increases came amid a dearth of supply and failed to lift consumer spending. The euro zone’s Markit purchasing managers index (PMI) of manufacturing activity rose to its highest level since December 2004, led by a surge in new orders. This news added to evidence that recession might be coming to an end in Europe.

In the currency markets, mounting recovery hopes meant that the dollar continued to lose its appeal as a “safe haven” in times of global turmoil. It fell a little over 4% against the euro to end the quarter at about $1.46, while declining 7% to around 90 yen.

Portfolio Review

As the rally continued through the quarter, our Funds generally reaped the rewards of active management. In large-cap equity, fundamental managers benefited from their security selections, but quantitative managers suffered. In small-cap equity, managers stuck to their beliefs that high-conviction choices would be rewarded, selecting growth companies and those focused on gaining market share during the recovery. In emerging-markets equity, stock selection continued to be the primary driver of performance.

Our Funds in the fixed-income space also had a successful quarter. For investment-grade fixed income, managers focused on active duration management and maintained overweights to non-Treasury sectors such as corporate bonds, commercial mortgage-backed securities and non-agency mortgage-backed securities (MBS). In high-yield fixed income, managers benefited from attractive valuations and improving sentiment. In emerging-markets debt, superior security selection added to performance across all Fund managers within this sector.

What Worked?	What Didn’t Work?
Positive stock selection in Large-Cap Equity – Particularly in Information Technology	Quality bias for Large-Cap Equity – Rally continued to be driven by low-quality stocks
Regional weighting in Non-U.S. Equity – An overweight to Asia Pacific ex-Japan benefited	Underweight to Materials in Small-Cap Equity – This sector staged a rebound as the BRIC countries’ outlooks improved and the dollar weakened
Overweight to corporate bonds in Core Fixed Income – Particularly within Financials	Exposure to Financials in Non-U.S. Equity – Especially stock selection within and an underweight to this sector
Allocation to Structured Credit in High-Yield Bonds – Performed well as fundamentals improved for Collateralized Loan Obligations	Underweight to agency debentures in Core Fixed Income – These securities showed improvement
Overweight to Argentina in Emerging-Market Debt – All managers in the Fund benefited from this stance	Underweight to Multi-Line Insurance in High-Yield Bonds –bonds in this sector rallied over the quarter

Manager Positioning and Opportunities

SEI’s portfolio managers have focused on finding managers that provide consistent returns over time. For large-cap equity, our Fund managers believe that as the recovery progresses, high-quality companies should benefit going forward, and they remain positioned in these securities. In small-cap equity, managers have reaped rewards from securities they purchased during indiscriminate selling that took place earlier in the year. Turnover has decreased, and they believe that opportunities are attractive going forward as merger and acquisition activity and future earnings growth potential both rebound. In non-U.S. equity, managers are finding appealing securities in Asia Pacific ex-Japan, which they believe will be a leader as the global markets emerge from recession. Our investment-grade fixed-income managers remain overweight to non-agency MBS and underweight agency MBS. In high-yield as well as in emerging-markets debt, managers have been increasing risk exposure by adding higher-yielding credits.

Summary

In SEI’s view, global equity markets should be able to extend their rallies through the rest of this year, as long as there continues to be supporting evidence that the global economy is improving and corporate profits are rising. However, we believe it is unlikely that the pace of gains witnessed over the past five months can be sustained through the rest of the year.

SEI believes the global economy is going through a healing process, with moderate growth and signs of improvement continuing in the developing economies of the world. Over the next year, SEI expects to see decent economic growth across the globe and a good rebound in corporate profits. However, as we get into 2010 there will be some headwinds, such as the massive debts that U.S. and European governments have taken on in their efforts to stimulate growth. Further increases in oil and other commodity prices could also put a dent in consumers’ discretionary spending.

We remain optimistic regarding the corporate bond markets. Although high-yield corporate bonds have appreciated strongly, yield spreads (the difference between the higher yields available in this sector compared to equivalent government bonds) remain attractive. We expect non-government bonds to continue to outperform government debt if economic growth turns positive and corporate cash flows improve.

This material is for educational purposes only and is not meant to be investment advice. The reader should consult with his/her financial advisor for more 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. To determine if the Fund(s) 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 Fund's prospectus, which may be obtained by calling 1-800-DIAL-SEI. Read it carefully before investing.

SEI Investments Management Corporation (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. Diversification may not protect against market risk. Current and future portfolio holdings are subject to risks as well.

In addition to the normal risks associated with equity investing, 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. REIT investments are subject to changes in economic conditions, credit risk and interest rate fluctuations. Bonds and bond funds will decrease in value as interest rates rise.

Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results.

For those SEI Funds which employ the 'manager of managers' structure, SEI Investments Management Corporation has the ultimate responsibility for the investment performance of the Fund due to its responsibility to oversee the sub-advisers and recommend their hiring, termination and replacement.

• Not FDIC Insured
• No Bank Guarantee
• May Lose Value

Glossary

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 Barclays Capital U.S. Aggregate Bond Index (formerly Lehman Brothers U.S. Aggregate Bond Index) is a benchmark index composed of U.S. securities in Treasury, Government-Related, Corporate, and Securitized sectors. It includes securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $250 million.

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. Common usage: The Chicago Board Options Exchange Volatility Index (VIX), a barometer of market volatility.

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 JP Morgan Emerging Market Bond Index is a total-return, unmanaged trade-weighted index for U.S. dollar-denominated emerging-market bonds, including sovereign debt, quasi-sovereign debt, Brady bonds, loans and Eurobonds.

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 MSCI EAFE Index is an unmanaged, market-capitalization-weighted equity index that represents the developed world outside North America.

The MSCI Emerging Markets Index is a free-float-adjusted, market-capitalization-weighted index designed to measure the performance of global emerging market equities.

The Merrill Lynch Commercial Mortgage-Backed Securities Index Series is an index of fixed-rate, investment-grade commercial-mortgage-backed securities and includes sub-indices based on average life and credit-quality ratings.

The Merrill Lynch High Yield Master II Constrained Index is a market-value- weighted index of all domestic and Yankee high-yield bonds, including deferred interest bonds and payment-in-kind securities. Its securities have maturities of one year or more and a credit rating lower than BBB-/Baa3 but are not in default.

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 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.