January 2012 Market and Performance Update

February 21, 2012 by SEI Investment Management Unit

 
  • Credit rating downgrades and mixed economic news in Europe undercut optimism, but strong economic data releases from the U.S. and continued central bank support boosted sentiment.
  • Equity and fixed-income markets gained, with risky assets among the strongest performers.

Stock and bond markets continued the year-end rally into January. Eurozone government debt credit rating downgrades and generally mixed economic news in Europe served to undercut optimism to a degree, but strong economic releases from the U.S. and continued central bank support boosted sentiment. In particular, measures taken by the European Central Bank (ECB) to support the banking system and progress toward resolving Greece’s sovereign debt troubles helped fuel a hopeful outlook. Investors generally remained positive and market volatility calmed. Consequently, assets perceived to be riskier were favored during the month.

Economic Backdrop

Actions made to support banks and stabilize the finance sector in the eurozone were publicized by the ECB in December 2011. The announcement included the introduction of three-year loans, known as long-term refinancing operations, which are intended to help ease short-term money supply pressures on the region’s banks. This provision had a positive impact on sentiment in January as additional funding began to filter through to banks. It is now expected that the ECB will announce an extension to the program in the coming weeks.

While economic data for Europe improved slightly in January, the picture was still a mixed one. U.K. gross domestic product (GDP) showed a small contraction in growth during the final quarter of 2011, but indices that measure productivity and sentiment (Purchasing Managers Indices) suggested marginal improvements in U.K. services and manufacturing (in which the pace of declines slowed). Eurozone business confidence levels improved, and while unemployment in the region remained high, the pace of job losses slowed during December 2011. Central banks remained accommodative and the ECB voted to maintain interest rates at 1.00% in January, while the Bank of England once again left U.K. rates at 0.50%.

In January, the U.S. Federal Reserve (Fed) indicated that the country’s current low interest rates would continue until the end of 2014. This was longer than the markets expected (the Fed previously stated that interest rates would remain near zero until mid-2013), so the news was received positively. U.S. economic data releases in January further helped to foster an upbeat mood. Fourth quarter 2011 annualized GDP readings showed that growth in the U.S. economy rose to 2.8%, up from 1.8% in the third quarter. Unemployment numbers fell and consumer and business sentiment indices gained. However, U.S. annual inflation for 2011 rose by 3.00%, December retail sales disappointed and housing starts declined.

January was a busy month for credit rating agencies Standard & Poor’s (S&P) and Fitch Ratings (Fitch). On January 13, S&P downgraded its credit ratings on several European governments, including France, Italy, Spain and Portugal. While the action generated significant media attention, the actual market impact was minimal as most of the rating downgrades had been largely expected. Fitch followed suit on January 27 when it announced rating actions on five eurozone governments, including Italy and Spain.

Market Impact

Investor optimism at the start of the year resulted in fixed-income assets, which are perceived to be riskier, performing best for the month. High-yield bonds did particularly well, followed by corporate and emerging markets debt. Global government bonds generally fell out of favor and credit spreads tightened. Within government bonds, U.S. Treasurys did best, pushed higher by positive economic data releases and news of continued central bank support. The government debt of Portugal struggled in particular, largely due to the S&P downgrade, which pushed the rating to below-investment grade, or “junk” status. This led to concerns that Portugal could run the risk of defaulting on its debt, and that the country could soon follow Greece down the restructuring road.

Volatility continued to slow throughout January, as the degree of calm that returned to the markets at the close of 2011 continued into early 2012. Global equity markets benefited from this stability, and cyclical sectors performed well once again. Materials and Financials recorded the highest returns for the month, while more defensive sectors, such as Consumer Staples and Utilities, lagged. In line with a preference for riskier assets, emerging market equities did well for the month, as did smaller companies. Greek equities rebounded strongly, pushed higher by the favorable reaction to progress in talks surrounding the country’s debt restructuring process.

Index Data

  • The Dow Jones Industrial Average index gained 3.55%. 
  • The S&P 500 Index returned 4.48%. 
  • The NASDAQ Composite Index increased 8.06%. 
  • The MSCI AC World Index, used to gauge global equity performance, gained 5.81%. 
  • The Barclays Capital Global Aggregate Index, which represents global bond markets, rose by 1.67%. 
  • 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 from 23.40 to 19.44. 
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, remained relatively stable, falling from $98.83 a barrel at the end of December to $98.48 by January 31. 
  • The U.S. dollar weakened against most currencies, while sterling strengthened. The U.S. dollar fell against the euro, sterling and Japanese yen. It ended January at $1.58 against sterling, $1.31 versus the euro and at 76.25 yen.

Portfolio Review

SEI’s equity portfolios fared well as generally positive corporate earnings against the backdrop of improving economic indicators buoyed investor sentiment and the subsequent move into riskier assets. In large-cap equity, stock picking within Industrials detracted, while underweights to Consumer Staples and Utilities helped results. The Industrials sector was the largest contributor in small-cap equity with solid stock picks in transportation and capital goods. In international equity, results from stock selection were predominantly positive, with the strongest results coming from the Industrials and Energy sectors.

SEI’s fixed-income portfolios also posted solid performance numbers in January as a dovish Fed statement and outlook for interest rates fueled a rally across fixed-income asset classes and Treasurys at the end of January. In core fixed income, an allocation to non-agency mortgage-backed securities was a positive as liquidity and pricing strengthened during the month. An underweight to the underperforming Energy sector added to performance in high-yield bond. In emerging-markets debt, an overweight to Argentina and security selection in Venezuela contributed to relative returns due to the return of risk appetite and supportive commodity prices.

Contributors 

  • Stock Selection in Large-Cap Equity – specifically within the Consumer Staples and Information Technology sectors 
  • Consumer Staples Holdings in Small-Cap Equity – an underweight to and positive selection within food, beverage and tobacco helped results 
  • Country Allocation in International Equity – stock selection was positive across all regions within the Europe, Australasia and Far East Index 
  • Auto Parts Makers in High-Yield Debt – selection in this area proved to be beneficial to results

Detractors 

  • Industrials in Large-Cap Equity – both stock picking and sector allocation detracted from performance 
  • Energy Picks in Small-Cap Equity – an unfavorable overweight to exploration and production had a negative impact 
  • Consumer Discretionary in International Equity – weak selection in this sector diminished the Fund’s positive overall results 
  • Overweight to Iraq in Emerging Markets Debt – attacks and bombings added to geopolitical concerns

Manager Positioning and Opportunities

SEI’s portfolio managers aim to provide diversified sources of excess return for our portfolios through solid investment-manager selection and portfolio construction. In large-cap equity, managers have maintained overweights to Information Technology and Consumer Discretionary because they believe an attractive opportunity set is still present in these areas. In small-cap equity, there is a significant overweight position to the Industrials sector in the capital goods segment, specifically machinery. Information Technology also continues to be a strong weighting, with a concentration in software and services. International equity managers have reduced the underweight to the U.K. They have retained the underweight to Japan and Pacific ex-Japan, as well as the overweights to emerging markets in Latin America, Asia, and Europe, the Middle East and Africa.

In investment-grade fixed income, the overweight to non-agency MBS is expected to continue since securities in these sectors are attractively priced relative to conservative assumptions. High-yield debt managers have maintained an underweight to the Energy and Utility sectors on a valuation basis. In emerging-markets debt, managers like both corporate and local currency debt, and are likely to ride the momentum seen in these sectors a bit longer. However, they are expected to trim positions when they feel valuations have become stretched.

Our View

We no longer favor stocks over bonds, but rather have a neutral perspective. Within equities, we favor a tilt toward U.S. large company stocks. U.S. economic activity has rebounded, although the overall growth outlook remains moderate at best. We favor U.S. versus international equities as the debt crisis in Europe continues to spread, resulting in a slowing of growth in the core economies of Europe and near or outright recession in the debt-burdened periphery countries. Economic and financial problems in Europe also could harm the growth prospects of emerging-market exporters. We favor high-yield fixed income versus investment-grade fixed income. Bond markets have exhibited surprising resilience. While U.S. Treasurys continue to be viewed as a safe-haven play by investors whenever market turmoil intensifies, opportunities, in our view, are more attractive in the high-yield space (although the ride has become quite bumpy in recent months).

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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. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There is no assurance as of the date of this material that the securities mentioned remain in or out of SEI Funds.

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

To determine if the Funds 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 Funds’ prospectuses, which can be obtained by calling 1-800-DIAL-SEI. Read them carefully before investing.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. 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. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

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  • May Lose Value 

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