Commentary: Fourth Quarter 2009 Market and Performance Update

Summary

• Gains in “riskier” assets continue at a slower pace as the rally matures
• Dubai World’s request for delay on debt payments roils markets before being resolved
• Uncertainties remain regarding market reactions to the eventual unwinding of fiscal and monetary stimuli

Market Overview

While improving corporate profits stoked investor confidence, overall enthusiasm was limited due to both an increase in government debt and continued weakness in global labor markets. For the fourth quarter, the Dow Jones Industrial Index returned 8.90%, while the S&P 500 Index returned 6.04% and the NASDAQ Composite Index returned 7.20%. The MSCI AC World Index rose 4.63% for the fourth quarter as the global recovery continued to take hold in fits and starts. In the bond markets, the Barclays Capital U.S. Aggregate Bond Index returned 0.20% and the Barclays Capital Global Aggregate Bond Index fell 0.85% over the quarter, as European and U.S. government bonds faced potential credit-quality downgrades. However, riskier investments, such as high-yield and corporate bonds, still moved higher, buoyed by increasing profits for many companies.

Still, in a sign that cooler heads may be prevailing, 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 what it was at the end of September to just above 21 by quarter end.

Stocks

Economic data generally supported global recovery hopes, but investors remained cautiously optimistic regarding the continued pace over the past several months of rallies in equities, non-government bond markets and commodities. While a generally upbeat mood still exists in the market, participants appear to be uncertain about what the upcoming year will bring, particularly when global governments and central banks begin to unwind the stimulus efforts put in place during the recent market dislocation.

Globally, sector performance continued to send mixed signals about investors’ recovery hopes. Among the cyclical sectors, Materials led the way, climbing in line with a surge in copper, gold and other metals. Energy and Information Technology also outperformed the overall index, as oil prices moved higher and technology companies continued to show good prospects for the upcoming year in terms of free cash flow and business models focusing on consumer upgrades in the form of software and services. The cyclical Industrials sector slightly underperformed the index, joined by the more defensive Utilities and Telecommunications sectors among the laggards. Financials was the worst-performing sector for the quarter, falling on fears surrounding the potential for default on Dubai World’s debt as well as increased European forecasts regarding the amount of bad debts still remaining on bank balance sheets.

Bonds

Performance for the year in the fixed-income markets was led by the riskier areas of the market, as the low-quality rally beginning in March gave way to a more balanced perspective among various non-government sectors. A lack of inflationary pressures and continued demand for higher yields supported these non-government bond sectors, as corporate bonds, high-yield bonds and emerging-market debt moved higher. This was driven largely by glimmers of positive economic news in the form of small improvements in the U.S. labor markets.

In the U.S., Treasuries fell for the quarter, with most spread sectors continuing to rally as investors searched for risk and potential price appreciation. Gains were most prominent at the lowest end of the credit-quality spectrum, as CCC-rated securities and distressed loans performed best.

Corporate bonds generally outperformed government bond markets around the globe, and high-yield bonds outperformed their better-quality peers in the rest of the corporate sector as investors looked for yield. Despite a continuing rise in defaults for the commercial mortgage markets, commercial mortgage-backed securities (CMBS) staged a significant rally for the year, led by those with lower credit-quality ratings. However, these securities were among the few areas in the fixed-income markets to experience a decline in the middle of the quarter.

Emerging-market debt outperformed the overall global bond markets, despite Dubai World’s announcement at the end of November that it was requesting a delay in paying some of its debt. Fears largely vanished after Abu Dhabi announced it would provide $10 billion to help Dubai World avoid default. However, investors wondered whether other emerging countries may face pressures from an overabundance of debt similar to Dubai.

Economy

Although weakness in labor markets continued around the globe, there were some signs of stabilization in the U.S.; the Department of Labor announced that only 11,000 jobs were lost in the month of November, the strongest numbers seen since December 2007. However, during mid-December, weekly jobless claims increased unexpectedly and caused concern that employment would face continued setbacks. The index of leading economic indicators had its eighth consecutive monthly increase in November, and housing data showed improvements through an 8.9% increase in new-home starts for the month of November. The Federal Reserve kept the federal funds rate unchanged at the range of zero to 25 basis points and stated that interest rates will remain low “for an extended period.”

Oil prices increased over the quarter, with WTI Cushing crude oil prices (a key indicator of movements in the oil market) ending at around $79.36 per barrel. A rebound in the dollar against some currencies earlier in the quarter helped suppress oil prices somewhat (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 dollar rallied in December after experiencing weakness earlier in the quarter. The dollar rose 1% against sterling to roughly $1.62, and gained 2% to about $1.43 per euro. The U.S. currency was slightly stronger for the quarter against Japanese currency, ending around 92 yen.

Portfolio Review

As the recovery matured during the quarter, high-quality and momentum-oriented stocks rebounded, boosting returns for most of the SEI domestic equity Funds. In large-cap equity, our core managers struggled due to positioning in Utilities, but growth managers outperformed through strong stock selection in software and services. 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, an underweight allocation to Europe added to performance.

Solid performance in non-Treasury sectors helped SEI Fund performance for core fixed income, despite giving up some returns in November due to year-end selling. In high-yield bonds, an allocation to collateralized loan obligations was beneficial, as these investments continued to outperform the high-yield market. In emerging-markets debt, security selection in Venezuelan bonds added to performance.

What Worked?	What Didn’t Work?
Exposure to Technology in Large Cap Equity – the sector led the Russell 1000 Index for the quarter	Micro-cap exposure in Small Cap Equity – because larger companies generally beat smaller companies over the quarter
Strong stock selection in Small Cap Equity – especially in Consumer Discretionary	Stock selection in International Equity – particularly in Europe
Regional allocations in International Equity – particularly an overweight to emerging markets	Exposure to Household Products in High Yield – especially mattress-maker Simmons
Stock selection in Emerging Markets Equity – mostly in China, India, Indonesia and Turkey	Overweight to Ukraine in Emerging Market Debt – concerns remain surrounding upcoming elections
Security selection in High Yield – specifically in the Forestry/Paper sector

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.

Our View

SEI believes there have been continued signs of improvement in the world economy during the past quarter, which should 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. Currently, there is a focus on how interest-rate increases and the removal of bond-buying programs would affect the global economic recovery. In particular, we expect to see a more balanced performance between high- and low-quality stocks, large versus small companies and developed versus emerging markets. Assets that are perceived to be riskiest 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.

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.

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.