Knowledge Center Archive


Second Quarter 2012 Market and Performance Update

By SEI Investment Management Unit

  • Optimism turned sour in April and reached panic levels in May when concerns about economic and political problems in the eurozone resurfaced with a vengeance. 
  • Events surrounding the French and Greek elections led to increased uncertainty, as did the deepening eurozone debt crisis when troubles in Spain and Italy hit the headlines. 
  • Economic data released during this time painted an uncertain picture and seemed to indicate a pause in global economic growth. 
  • Risk avoidance became the key theme throughout April and May. Defensive assets, particularly government bonds, were favored during this time. 
  • The quarter managed to end on a positive note, as sentiment shifted once again in June. 
  • News of the financial bailout for Spain to help its ailing banks, the perceived positive outcome of the second round of Greek elections in mid-June and the European Union (E.U.) summit agreement all served to provide a degree of welcome relief.

Economic Backdrop

After causing panic in the markets in May, a eurozone-friendly outcome in the second Greek elections in mid-June temporarily stemmed the worry that Greece’s exit from the single currency union was imminent. Of the five political parties that won the largest share of the vote, only one—the communist KKE—advocated Greece abandoning the euro and restoring the drachma. Moreover, most polls indicated that the majority of Greek citizens wanted to remain in the eurozone.

Credit-rating agency Moody’s downgrade on the debt of 16 Spanish banks, news of rising bond yields on Spanish government debt and the knowledge that the country had slipped back into recession further roiled the markets at mid-quarter. By the end of the period, Spain became the fourth and largest eurozone economy to seek an international bailout to rescue its banks. It is important to note that Spanish banks (rather than the country’s government itself) were the subject of the bailout, meaning that Spain’s national debt levels did not increase as a consequence.

The outcome of the E.U. summit at the end of the quarter received a positive reception from the financial markets. The agreement included the granting of additional powers to the European Central Bank (ECB) over member states’ banks, ensuring that they should be able to be recapitalized directly from the eurozone rescue funds.

For the eurozone as a whole, economic data released during the quarter painted a gloomy picture. The ZEW Indicator of Economic Sentiment for Germany (a survey that also covers analyst opinions for Europe, the U.K., Japan and the U.S.) fell from 10.8 in May to -16.9 in June, marking the largest decline since October 1998. Unemployment levels for the region reached a record high of 11.00% in April, retail sales fell and manufacturing output declined. The Markit Eurozone Manufacturing Purchasing Managers’ Index (PMI) fell to 44.8 in May (any number below 50.0 indicates contraction). However, eurozone inflation fell to 2.4% in May (and was estimated to have maintained this rate during June).

The problems in Europe took their toll on the global economy, and the U.K. was already experiencing the pain of domestic austerity. News was therefore unsurprisingly mixed for the U.K. in the quarter. The final reading of first-quarter gross domestic product (GDP) confirmed that growth contracted by 0.3%, marking the country’s second recession since the start of the financial crisis. Further bad news showed that growth in the U.K. manufacturing sector slowed, which was reflected by the Markit/Chartered Institute of Purchasing & Supply U.K. Manufacturing PMI falling from a revised 50.2 in April to 45.9 in May. However, June retail sales were estimated to have risen after receiving a boost from the Queen’s Jubilee celebrations. Other positive news came from the announcement that the annual inflation rate, as measured by the U.K. Consumer Price Index, fell more than expected, from 3.0% in April to 2.8% in May. Also, the International Labour Organisation Unemployment Rate (three months) reported that the unemployment rate in the U.K. between January and March 2012 was confirmed at 8.2%, lower than initial estimates.

In the U.S., the second quarter was marked by weak economic data that did little to improve global investor sentiment. While positive, first-quarter GDP growth revealed a concerning slowdown in consumer spending as the figure (1.9%) was unchanged from the prior quarter. U.S. manufacturing continued in expansion mode through April and May, but fell in June, with a significant drop in new orders. The labor market struggled, as the economy averaged only 75,000 new jobs per month, down significantly from the average of 225,000 new jobs per month seen in the first quarter. The overall unemployment rate remained unchanged from the previous quarter at a stubbornly high rate of 8.2%.

Market Impact

The global financial markets were dominated by events in Europe and fears of a global economic slowdown during the quarter. The first two months of the period witnessed a return to the “risk-off” trade (especially in May), during which investors shunned assets perceived to be risky in favor of “safe havens” due to increased uncertainty. By June, however, most markets posted gains again.

For the quarter as a whole, global government bonds performed best, followed by emerging market debt. Corporate and high-yield debt lagged in comparison. Uncertainty in Europe and doubt over the strength of the global economy drove yields (which move inversely to prices) of safe-haven countries like Germany, the U.S. and the U.K. to new lows. However, yields on the government debt of peripheral eurozone countries proved to be exceptions. In particular, Spanish government bond yields reached levels in the period that previously triggered the bailouts of Greece, Portugal and Ireland. Spreads of the non-government bond sectors widened in the risk-averse periods, but came in again as sentiment improved in June.

Global equity markets fell in response to economic uncertainty during the quarter. Defensive sectors were favored for the period as a whole and Telecommunications, Health Care and Consumer Staples were the only sectors within the MSCI All Country World Index to post positive returns (in U.S. dollar terms). The Materials sector struggled the most, posting a double-digit decline for the period. Other cyclical sectors also fared poorly, with Energy, Information Technology and Financials all lagging. In terms of country returns, Greek equities bore the brunt of negative sentiment during the quarter and experienced large declines, although most peripheral eurozone countries also had a difficult time.

Index Data* 

  • The Dow Jones Industrial Average index declined 1.85% in the second quarter. 
  • The S&P 500 Index fell 2.75% during the period. 
  • The NASDAQ Composite Index posted a second-quarter return of -4.76%. 
  • The MSCI AC World Index, used to gauge global equity performance, fell by 5.56% over the quarter. 
  • The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.62% during the period. 
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” moved from 15.50 to 17.08 during the quarter, but reached 26.66 on June 1 (the highest level so far in 2012). 
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $103.02 a barrel at the end of March to $84.96 by June 30.
  • The U.S. dollar strengthened against the euro and sterling during the quarter, but weakened against the Japanese yen. The euro weakened against most major currencies in the period. The U.S. dollar ended May at $1.57 against sterling, $1.27 versus the euro and at 79.79 yen.

*Source: Bloomberg

Portfolio Review

Eurozone worries started to look more like panic and, coupled with poor U.S. and Chinese data, pushed global stock markets down sharply at mid-quarter. However, sentiment recovered as investors were encouraged by the results of a second round of Greek elections and a eurozone summit where leaders agreed to take steps toward a unified banking system overseen by the ECB. The volatile market environment created strong headwinds for equities and most credit assets, while perceived safe havens, such as U.S. Treasurys, performed well. In large-cap equity, stock selection within the Consumer Discretionary and Health Care sectors detracted while selection within Industrials, Materials and Telecommunications was beneficial. In small-cap equity, sector allocation and security selection dragged on performance but security selection in the Telecommunications and Utilities sectors was a bright spot. In international equity, strong stock selection in Japan overcame the drag from overweight positions in Canadian and emerging-market stocks to yield marginal outperformance, and sector allocation also was positive. SEI’s riskier fixed-income portfolios were affected by the seemingly endless negative headlines, heightened volatility and investor risk aversion but regained their footing in June. In core fixed income, a curve flattener position helped overcome the drag from a short duration stance as Treasury yields fell across the curve, and commercial, agency and non-agency mortgage-backed securities helped performance. In high yield, an underweight to Energy and overweights to Consumer Cyclical and Health Care were positive, while an allocation to collateralized loan obligations, which remain attractively valued in our view, hurt results. In emerging markets debt, overweights to higher yielding countries and an allocation to corporate debt detracted, while an underweight to Lebanon, overweight to Qatar and security selection in Mexico were beneficial.


  • Selection in Large-Cap Equity – Industrials, Materials and Telecommunications were a bright spot 
  • Selection in Small-Cap Equity – security choices in Telecomms and Utilities helped performance 
  • Country Allocation and Selection in International Equity – managers were able to find pockets of strength in Japanese equities 
  • Sector Allocation in High Yield Debt – overweights to Consumer Cyclical and Health Care aided results 
  • Selection in Emerging Markets Debt – selection in Mexico provided a tailwind


  • Stock Selection in Large-Cap Equity – picks in Consumer Discretionary and Health Care detracted from results 
  • Sector Underweights in Small-Cap Equity – defensive sectors outperformed during the quarter 
  • Regional Allocations in International Equity – Canada and emerging markets weighed on results 
  • Sector Allocation in High Yield Debt – underweights to the Automotive and Banking sectors hurt results 
  • Country Allocations in Emerging Markets Debt – Argentinean government debt and Brazilian and Russian corporates detracted

Manager Positioning and Opportunities

SEI’s portfolio managers use solid investment-manager selection and portfolio construction in an attempt to deliver diversified sources of excess return for our portfolios. In Large-Cap equity, managers are maintaining overweights to Information Technology and Consumer Discretionary while holding underweights to Industrials and Utilities. Fundamental managers continue to have a quality bias, believing that the U.S. economy is in for an extended period of low growth, but not an outright recession. In Small-Cap equity, the portfolio manager believes that the domestic economy is likely to remain on a slow growth trajectory and remains positioned to benefit from a gradually (if unevenly) improving economy. However, given the risk of further economic deterioration, an overweight to Information Technology was pared, an underweight to Consumer Staples was increased, and an overweight to Health Care was extended. International equity managers are maintaining a strategic overweight to emerging markets, as they still see these as the source of future global growth. In contrast, they are underweight to the aging economy of Japan, which may only have a few more years before it must confront its staggering fiscal deficit, although managers are employing shrewd stock selection to uncover pockets of strength in the country.

In investment-grade fixed income, managers continue to see attractive value in the Financial sector, where spreads remain wide despite improving fundamentals and stricter regulations and capital requirements that should benefit bondholders. High-yield debt managers maintained allocations to bank loans and structured credit which, despite a difficult quarter, continue to represent attractive areas of the market. In Emerging Markets Debt, managers are more defensive than normal given the global economic environment; while local currency debt is attractive in fundamental terms, the current environment is not favorable for short-term trading decisions. Positions in high-yield external debt are being maintained as we believe investors are being adequately compensated for assuming risk in that area of the market.

Our View

SEI continues to hold a neutral view on stocks versus bonds. The potential for big surprises — either to the downside (e.g., further economic weakness, the crumbling of the eurozone) or the upside (e.g., more forceful actions in Europe, quantitative easing or a breaking of the financial logjam in the U.S.) — sit side by side. We would be inclined to favor equities if the markets weaken materially further. This view assumes that the soft patch in the U.S. economy proves temporary once again, that Europe muddles through into 2013 without a major breakup, and the currency depreciation and pro-cyclical monetary policies in China and other emerging economies start to bear fruit going into year end.

Momentum trends continue to favor U.S. equities versus international, particularly against Europe and the eurozone. We recognize that this trend has been in place for more than a year. Recession, debt traps and the possibility of a eurozone breakup have caused European equities to weaken to an extreme extent. We look for the cycle of panic, government response, relief and more panic to continue in European markets.

We also favor U.S. high-yield debt and other corporate credits versus U.S. Treasurys and the sovereign debt of other countries. Investor demand remains buoyant for higher-yielding assets because central bank policies have compressed yields to record-low levels around the globe. Issuers also remain in good shape, keeping default rates at low levels. In the near term, worries about the economy could cause some widening in spreads versus Treasurys. We would view this as a buying opportunity.



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. Emerging Markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

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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