Commentary: October 2009 Market and Performance Update

Summary:

• Stocks fall as recovery hopes are scaled back
• Thirst for yield continues to drive demand for riskier bond sectors
• Strong U.S. GDP offset by weak labor markets and lower consumer confidence

Markets were slightly lower for the month, as questions grew about the sustainability of the global economic recovery. Although most companies around the globe reported third-quarter earnings either in line with or better than expectations, investors generally reacted with disappointment, sending stocks lower.

For the month of October, the Dow Jones Industrial Average returned just 0.14%, while the S&P 500 Index returned -1.86% and the NASDAQ Composite Index returned -3.59%. The MSCI World AC Index fell by 1.54%, showing uncertainty was spread worldwide. In the bond markets, the Barclays Capital U.S. Aggregate Bond Index rose 0.49% and the Barclays Capital Global Aggregate Bond Index gained 0.47%, as investor optimism remained intact in the bond markets, helped by a lack of inflationary pressures and a continued search for higher yields.

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,” rose nearly 20% to finish the month at just over 30. Thus, volatility remains higher than its long-term average, as market participants grapple with mixed economic data and a sluggish rebound.

Stocks

Investors took a breather from their recent buying spree, and many areas of the global stock markets that led the way during the rally over the last several months tended to lag in October.

Globally, Financials was one of the worst-performing sectors. While several financial institutions posted third-quarter results that were better than forecast, investors reacted more to negative headlines, such as a larger-than-expected loss at Bank of America and analysts’ downgrades of Wells Fargo.

Consumer Staples and Energy were the only sectors to post a gain in the global markets during October. The latter was supported by rising oil prices, while the former was favored for its stable earnings as the specter of economic uncertainty returned. A less optimistic view about future global economic prospects also weighed on the Materials sector, keeping it near the bottom of the rankings.

Growth stocks fared better than value stocks, as investors showed a preference for solid earnings over bargain prices. Smaller companies, which like value stocks are perceived to be riskier and more vulnerable in environments of economic weakness, also generally fell more than large companies in the overall global equity market, and emerging markets underperformed the global market as well.

Oil prices rose nearly 10% over the month, with WTI Cushing crude oil prices ending at $70.00 per barrel amid signs of continued strong energy demand among developing countries, particularly China. However, oil-price gains were limited toward the end of the month, as the dollar rebounded from an earlier bout of weakness. A higher dollar would tend to reduce the demand for oil, which is denominated in dollars, by making it more expensive in foreign currency terms.

Bonds

The Barclays Global Aggregate Bond Index was led by some of the areas that are considered poorer credit quality and higher risk, such as high-yield bonds and commercial mortgage-backed securities (CMBS). CMBS, despite ongoing deterioration in the commercial real estate market and rising default rates in the sector, continued to be snapped up by investors in search of higher yields. Corporate bonds in general also outperformed government debt over the month, bolstered by generally positive corporate earnings news. Furthermore, high-yield bonds outperformed their better-quality peers in the rest of the corporate sector, bolstered by generally improving corporate earnings in the third quarter.

Government bond prices fell across the major markets, pushing yields higher. Fixed-income investors began to anticipate a need for central banks to unwind some of their aggressive stimulus measures, such as near-zero interest rates and bond-buying programs.

Emerging-market debt underperformed the global developed bond markets, as recovery hopes waned somewhat over the month. Otherwise, the trend of favoring riskier fixed-income assets for their higher yields continued.

Economy

Economic indicators were mixed, with continued weakness in labor markets around the globe and concerns that consumer demand may stagnate combining with signs of improvement in housing markets and positive indicators for industrial production. One of the major highlights was a robust 3.5% annualized pace of growth in U.S. third-quarter gross domestic product (GDP), which was in line with economists’ forecasts. While much of the growth was attributed to temporary stimulus measures, such as the U.S. government’s “Cash for Clunkers” program, there was also a broad-based increase in industrial production. U.S. unemployment levels, however, continued to increase, and consumer confidence weakened.

Economic data followed a similar pattern in Europe and the UK. In the UK, GDP data fell 0.7% over the third quarter, well below the weakest forecast in a Bloomberg survey of economists. Still, UK house price indicators continued to show improvement over the month and raised hopes that household spending would recover. In early October, the European Central Bank signaled its concern over the economic outlook, cutting interest rates to a record low of 1.00%. At a Brussels summit toward the end of the month, European Union officials also expressed the view that it was too soon to unwind stimulus measures.

The dollar fell against most other major currencies over October as a whole, as investors searched for better returns outside the U.S., although some of the losses were trimmed in the final days as global recovery optimism faded. The dollar fell by 3% against sterling to roughly $1.65, while declining approximately 1% to about $1.48 per euro. The dollar rose about 1% to roughly 91 yen.

Portfolio Review

Despite the more subdued atmosphere in October, our Funds were helped by their diversified exposures. In large-cap equity, fundamental managers benefited from their selections in high-quality names, but the performance of core managers was mixed. In small-cap equity, value managers posted strong performance through stock selection in retail companies, many of which posted better-than-expected results during earnings season. In emerging-markets equity, robust stock selection in Consumer Staples and Industrials partial offset weak selection in Financials and Materials.

Our Funds in the fixed-income space also had a successful quarter. For investment-grade fixed income, spread tightening in non-Treasury sectors such as corporate bonds, commercial mortgage-backed securities and non-agency mortgage-backed securities (MBS) aided performance. In high-yield fixed income, an allocation to structured investments performed well. In emerging-markets debt, superior security selection in Russia was beneficial.

What Worked?	What Didn’t Work?
Quality bias for Large-Cap Equity – Particularly in Diversified Financials and Semiconductors	Underweight to Consumer Staples for Large-Cap Equity – Defensive stocks became more popular this month
Stock selection in International Equity – Especially in Spain, Sweden and Hong Kong	Poor Stock Selection in Small-Cap Equity – Particularly in Consumer Discretionary and Financials
Overweight to corporate bonds in Core Fixed Income – Particularly within Financials	Underweight to Australia in International Equity – These securities rallied as commodity prices increased
Allocation to Collateralized Loan Obligations in High-Yield Bonds – Performed well as outlook continued to improved	Underweight to agency debentures in Core Fixed Income – These securities showed improvement
Overweight to Argentina in Emerging-Market Debt – Benefited from news that the government will restructure defaulted debt and may issue new bonds	Underweight to Banking in High-Yield Bonds –bonds in this sector rallied as financial markets stabilized further and on news that GMAC might receive a third round of government funding

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 continue to benefit going forward, and they remain positioned in these securities. In small-cap equity, managers have increased overweights to Industrials, as conditions for this sector are also improving. 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 non-agency MBS and underweight agency MBS. High-yield managers are gradually reducing an underweight to the banking sector, and in emerging-market debt, higher-yielding securities are being offered at attractive valuations.

Summary

SEI believes there have been sufficient signs of improvement in the world economy in recent months to keep the recovery in the global financial markets on track, although the pace of gains is likely to be more tempered in the months ahead. In particular, we would expect to see a more balanced performance between high- and low-quality stocks, large versus small companies and developed versus emerging markets. Riskier assets could continue to perform reasonably well as economic activity revives and corporate profitability improves, but the magnitude of the outperformance should diminish.

Similarly, the dramatic narrowing that has already occurred in the spread between the yields on non-government and government debt probably limits the potential for further price gains in non-government sectors. Although corporate bonds and high-yield debt are still attractive versus U.S. Treasuries (a benchmark for the lowest-risk assets), yields have fallen to levels that prevailed before the fall of Lehman Brothers. Emerging-market debt appears expensive, with the absolute level of yields having fallen close to the lows recorded at the previous peak in these markets.

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.

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• 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.