Commentary: November 2009 Market and Performance Update

Summary

• Gains in “riskier” assets continue alongside surge in Treasuries
• Dubai World’s request for delay on debt payments briefly roils markets at month end
• Gains in government bonds and “safe-haven” currencies suggest some unwinding of risk

Market Overview

While global hopes for a substantial economic recovery were alive and well, enthusiasm seemed to be on the wane. Both equity and fixed-income markets posted gains for the month, but investors turned cautious following the strong rally in riskier assets that has taken place since mid-March. Dubai World announced on November 25 that it was seeking to delay payments on much of its debt, casting a brief pall over what had been generally upbeat investor sentiment heading into year end.

For the month of November, the Dow Jones Industrial Average returned 6.93%, while the S&P 500 Index returned 6.00% and the NASDAQ Composite Index returned 5.05%. The MSCI World AC Index returned 4.11%, amid continued optimism about the global recovery. However, gains were pared in the final days of the month amid fears that state-owned Dubai World may default on some of its roughly $60 billion in liabilities. In the bond markets, the Barclays Capital U.S. Aggregate Bond Index rose 1.29% and the Barclays Capital Global Aggregate Bond Index rose 2.55%, posting gains for both government bonds and non-government fixed-income sectors. Major government bonds surged around the globe at month end, as investors sought the perceived safety of these assets, while fear of contagion spreading from Dubai eroded much of the gains that emerging-market bonds experienced earlier in the month.

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,” fell by roughly a fifth to just below 25 by month end.

Stocks

Economic data mostly supported global recovery hopes; however, as had been the case in October, investors showed some caution with regards to some of the more optimistic recovery assumptions behind the rallies in equities, non-government bond markets and commodities over the past several months.

Globally, sector performance also sent mixed signals about investors’ recovery hopes. Among cyclical sectors, Materials raced ahead of all others with a near-10% gain, climbing in line with a surge in copper, gold and other metals. However, this extreme positive sentiment was not echoed in the Energy sector, which underperformed the overall index as oil prices barely moved over the month. While Industrials also outperformed the MSCI AC World Index, it was joined by the more defensive Healthcare sector among the top gainers. In addition to Energy, other laggards were Consumer Discretionary and Consumer Staples. Financials brought up the rear, taking a hit at the end of the month because of the news from Dubai World.

Bonds

Performance in the fixed-income markets was evenly balanced between government and non-government sectors, with both making roughly equivalent gains. A lack of inflationary pressures and continued demand for higher yields supported non-government bond sectors in November, while a desire to limit exposures to areas of perceived risk bolstered demand for the relative safety that government debt is seen to provide.

A breakdown of U.S. Treasury auctions during the month suggested a high level of demand from foreign central banks, particularly for shorter-dated Treasuries, which contributed to the sharp decline in two-year Treasury yields. This was interpreted by some analysts as suggesting a desire on the part of central banks to buy dollars in order to limit gains in their own currencies against the U.S. dollar.

Corporate bonds performed roughly in line with government bond markets around the globe in November, although high-yield bonds underperformed their investment-grade peers in the rest of the corporate sector as investors started to show more selectivity in their purchases. A continuing rise in defaults for the commercial mortgage markets also caught up with commercial mortgage-backed securities, which were among the few areas in the fixed-income markets to experience a decline for the month.

Emerging-market debt erased a lot of its strong gains from earlier in the month and ended up with a more modest return than the overall global bond markets, as investors wondered whether other emerging countries may face pressures similar to Dubai from an overabundance of debt.

Economy

Although weakness in labor markets continued around the globe, there were some signs of stabilization in U.S. weekly jobless claims. Further signs of improvement in the housing market also emerged. However, orders for durable goods weakened again, as economists debated whether there will be an extremely shallow, short recovery in manufacturing. Third-quarter U.S. gross domestic product figures were revised downward by 70 basis points.
Oil prices were roughly flat over the month, with WTI Cushing crude oil prices ending at around $77 per barrel, despite gains in other commodity markets. A rebound in the dollar against some currencies during the month helped suppress oil prices (a higher dollar would tend to reduce demand for oil, which is denominated in dollars, by making it more expensive in other currency terms).

The U.S. dollar had a mixed performance against other major currencies in November, while the yen gained against all other currencies. The dollar rose about half a percent against sterling to roughly $1.64, while declining approximately 2% to about $1.50 per euro. The dollar fell about 5% to a 14-year low around 86 yen, with much of the decline coming in the wake of the Dubai news.

Portfolio Review

Early cyclical stocks rallied for the month, which was a drag on returns for most of the domestic equity Funds. In large-cap equity, core managers struggled due to an underweight to Materials and Industrials, but growth managers outperformed through strong stock selection in Consumer Discretionary. In small-cap equity, our Funds were helped by a bias against regional banks, which remain under pressure due to issues in their commercial real estate loan portfolios. In international equity, exposure to emerging markets added to performance.

Widening spreads in non-Treasury sectors, as well as short duration, hurt Fund performance for core fixed income. In high-yield bonds, an allocation to collateralized loan obligations was beneficial, as these investments outperformed the high-yield market for the sixth straight month. In emerging-markets debt, an overweight to Iraq weighed on performance.

What Worked?	What Didn’t Work?
Tight sector exposures in Large Cap Equity - minimized the impact from wide, choppy sector dispersion	Poor stock selection in Large Cap Equity – especially in Utilities
Strong stock selection in Small Cap Equity – especially in Financials	Value exposure in Small Cap Equity – because the market focused on low-quality assets and early cyclicals
Regional allocations in International Equity – particularly an overweight to North America	Stock selection in International Equity – particularly in Europe and Japan
Stock selection in Emerging Markets Equity – mostly in China, India and Brazil	Overweight to Commercial Mortgage-Backed Securities (CMBS) in Core Fixed Income – spreads widened over the month
Underweight to Financials in High Yield – specifically in the Banking and Multi-Line Insurance sectors	Overweight to Ukraine in Emerging Market Debt – concerns remain surrounding upcoming elections

Manager Positioning and Opportunities

SEI’s portfolio managers remain focused on finding managers that provide consistent returns over time. For large-cap equity, our Fund sub-advisors 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 are underweight to the biotechnology and pharmaceutical industries amid increased regulatory uncertainty and a lack of earnings visibility. 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 CMBS. High-yield managers are gradually reducing an underweight to the banking sector as the economic recovery takes hold, and in emerging-market debt, security selection will be a critical way to add value while steering away from event risk.

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, yields have fallen to levels that prevailed before the fall of Lehman Brothers. Emerging-market debt appears expensive, with 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 can 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.

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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.

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 (dollar-denominated, foreign issued) 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.