Commentary: January 2010 Market and Performance Update

Summary

• Global equity markets fell on concerns that tighter regulations will stymie growth
• Greek government bonds were downgraded and Japanese government bonds were warned of a possible downgrade
• The Japanese yen and the U.S. dollar strengthened against sterling and the euro

Our view that the global economy will continue to recover, albeit in fits and starts, received ongoing confirmation in January. While fourth-quarter gross domestic product (GDP) for the U.S. and U.K. turned positive, ongoing weakness in the labor markets and uncertainties about the sustainability of the recovery persisted. While investors were willing to take more risks at the beginning of the month, this impulse was scaled back toward the end of the month, as China and the U.S. announced new regulations and requirements aimed at the banking industry. In China, banks were required to raise their reserve requirements, making it more difficult to lend, in an effort to control the nation’s rapid growth. In the U.S., the Obama administration proposed separating a bank’s deposit-taking activities from its more speculative business activities, such as making trades for its own profit.

In January, the Dow Jones Industrial Index returned -3.32%, while the S&P 500 Index returned -3.06% and the NASDAQ Composite Index returned -5.34%. The MSCI AC World Index ($) fell 4.31% in January, as optimism about the global recovery was dampened by the potential for tighter reins on Chinese monetary policy and increased U.S. regulation of the financial markets. In the bond markets, the Barclays Capital U.S. Aggregate Bond Index returned 1.53% and the Barclays Capital Global Aggregate Bond Index ($) rose 0.41% over the month, posting smaller gains for government bonds and relatively larger gains for non-government fixed-income sectors.

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 from around 21 at the start of the month to just above 24 by the end of January, which has been attributed to growing doubts about the sustainability of the recovery.

Stocks

Investors started the year with high hopes that they would see the global economy continue to grow and improve. As the month wore on, though, weak labor markets and a decrease in consumer spending presented challenges to sustained growth. In addition, the unknown effects of the gradual removal of government stimulus packages gave investors more reasons to be cautious about taking on additional risky assets.

Sector performance within the MSCI AC World Index emphasized investors’ caution, as many of them focused on sectors that are less sensitive to broad market movements. For the month, these more defensive sectors led the Index; Healthcare and Consumer Staples were the top performers. Information Technology lagged the market, as did the formerly best-performing Materials sector. Financials was again the worst performer, falling on fears that China will begin to slow the pace of its rapid growth and that the Obama administration’s proposed banking reforms will be implemented.

Bonds

Performance in the fixed-income markets was slightly positive for January, and non-government bonds outperformed government bonds. Although investors were willing to take on additional risk at the start of the month, they returned to assets perceived to be safer after announcements about tighter Chinese monetary policy and increased U.S. regulation for the banking industry.

Greek sovereign (government) debt was downgraded by U.S. credit-ratings agency Standard & Poor’s (S&P), which expressed low confidence in the Greek government’s ability to limit its spending. As a result, the European Union reluctantly announced it would step in to support Greece as necessary, alleviating fears of larger issues in the Eurozone. The Greek debt crisis put added negative pressure on the euro. Further negative news on the global government debt front occurred, as massive government spending and a declining price environment led S&P to issue a downgrade warning for Japan.

Economy

Economic data for the month showed that the world has continued to move forward from the turmoil of the past few years. Fourth-quarter U.S. gross domestic product rose 5.7% over the previous quarter, its fastest pace in six years. Labor markets remained weak worldwide, and U.S. jobless claims rose unexpectedly at the end of the month. The U.S. Consumer Price Index posted a small gain, but inflation seemed to be under control for the near term. The Reuters/University of Michigan index of consumer sentiment rose to 72.8 in January from 72.5 in December, the highest reading since September 2009. However, concerns remain about whether growth will remain robust after government stimulus efforts are taken away.

Oil prices fell for the month, with WTI Cushing crude oil prices (a key indicator of movements in the oil market) ending at around $72.90 per barrel. This decline was in response to several factors including a strengthening U.S. dollar, tighter Chinese central bank requirements, proposed U.S. financial regulation and warmer weather in North America.

The dollar continued its rally, strengthening against sterling, ending the month at roughly $1.60 per British pound and $1.39 per euro. On the other hand, the dollar weakened against Japanese currency, ending at around 90 yen. The yen gained against all 16 of the most-traded currencies for the month.

Portfolio Review

Investor uncertainty and market volatility created a difficult environment for SEI’s Funds. In large-cap equity, our core managers struggled due to positioning in Financials, but value managers with contrarian investment philosophies outperformed through strong stock selection. In small-cap equity, our Funds were also hindered by a meaningful underweight to commercial banks, which generally posted positive performance for the month. In international equity, an underweight allocation to and strong stock selection in Europe, especially in France and Germany, added to performance.

Solid performance in non-Treasury sectors helped SEI Fund performance for core fixed income, as yield spreads narrowed. In high-yield bonds, an allocation to collateralized loan obligations continued to be beneficial, as these investments continued to outperform the high-yield market. In emerging-markets debt, an overweight to Ukrainian bonds added to performance.

Contributors	Detractors
Exposure to Technology in large-cap equity – the sector led the Russell 1000 Index for the quarter	Overweight to Technology in large-cap equity – the sector significantly trailed the market in January
Strong stock selection in small-cap equity – especially in Consumer Discretionary and Industrials	Stock selection in international equity – particularly in Japan and Finland
Sector allocations in international equity – particularly in Consumer Staples and Telecommunications	Underweights to Banking and Lease Financing in high-yield bonds – these were the best-performing sectors for the month
Stock selection in emerging-markets equity – mostly in Turkey	Overweight to Argentina in emerging-market debt – concerns remain surrounding the use of its central bank reserves
Security selection in high-yield bonds – specifically in the Media 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 Funds’ underlying investment managers remained positioned in high-quality securities, as they believe these companies should continue to benefit as the recovery takes hold. 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 maintaining an overweight to 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 mortgage-backed securities and residential asset-backed securities. High-yield managers are gradually reducing their allocations to bank loans as better opportunities arise, and in emerging-market debt, security selection will be a critical way to add value while steering away from event risk.

Our View

We believe that overly vigorous economic growth in China and other leading emerging economies may foster the need for additional monetary tightening, which could curb the rapid rallies we have seen in emerging-market stocks and bonds. At the other end of the spectrum, growth may continue to be rather slow in the developed world, especially in Europe and Japan. We are focusing on higher-quality sectors of the market and on momentum strategies that benefit from more consistent market trends.

Substantially increased fiscal restraint and continued low inflation should keep bond yields from rising significantly and keep short-term interest rates low. We continue to see opportunities in credit, although the potential for appreciation is far less than it was last year. Although the consensus view on Treasury bonds is that it would be prudent to sell them, we would argue that low inflation and an exceedingly slow exit from monetary easing will offset the pressures of heavy debt issuance to a large extent. We expect trading to stay within a tight price range for an extended period.

The key concern in our view is the exit from governmental “life support.” A big increase in government spending was certainly the correct response as private-sector demand fell away in the latter part of 2008 and early 2009, but it may reduce economic growth potential over the long term, as stock prices usually fall during times when government spending rises substantially. While we remain optimistic about equities and fixed income, we are unsure whether investors have appropriately assessed the economic and market risks for the year ahead.

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.