Commentary: April 2010 Market Update

Summary: 

• Global equity and fixed-income markets were both flat on renewed investor caution 
• Potential for sovereign debt default in Greece was the major driver of uncertainty, as European Union (EU) leaders and the International Monetary Fund looked to create a definitive bailout plan
• Labor markets and economic growth remained weak

During April, investors displayed caution as tensions escalated regarding the Greek sovereign debt crisis. Although many global economic indicators reflected a continued recovery, worries remained that troubles in Greece could spread to other European countries and possibly stall worldwide growth. Government bonds issued in Greece, Portugal and Spain were all downgraded by credit-rating agencies during the month.

In April, the Dow Jones Industrial Index returned 1.53%, while the S&P 500 Index returned 1.58% and the NASDAQ Composite Index returned 2.68%. The MSCI AC World Index ($) was mostly flat, up just 0.17% for the month, as doubts grew about the sustainability of recovery amid high levels of government debt. It is SEI’s view that global economic growth will continue to be sluggish, especially as governments and central banks deal with potential government bond defaults. The Barclays Capital Global Aggregate Bond Index ($) continued to be flat, returning 0.02% for the month. Corporate bonds and high-yield bonds continued to see strong gains due to better-than-expected earnings reports and improving profits from cost-cutting programs.

Stocks

There were increased concerns that the growing debt crisis in Greece and other European nations would stall euro-zone economic recovery and begin to negatively affect other European nations with high levels of debt. Although European leaders and the International Monetary Fund (IMF) worked to define a plan to provide financial assistance to Greece, investors were not convinced that it would be able to stave off larger sovereign debt troubles. The global economy is gradually improving, but the U.S. and the U.K. central banks maintain that policies will remain accommodative for some time to come.

Sector performance within the MSCI AC World Index was mixed, as weak labor markets remained and market participants waited to see what the Greek bailout package would entail. For the month, top performers were Consumer Discretionary, Information Technology and Industrials, while Healthcare, Materials and Telecommunications lagged the broader market.

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,” began the month at about 17 but then rose to around 22 at the end of the month, amid worries about possible sovereign debt defaults in peripheral Europe.

Bonds

Performance in the fixed-income markets was flat for the month, and non-government bonds generally outperformed government bonds. Reflecting increased wariness, investors looked for safe havens, such as shorter-maturity German and U.S. government bonds, as speculation about defaults in other countries continued to make headlines. However, positive news about corporate earnings and increases in manufacturing globally signaled that the economic recovery, while slow, continues to take hold, which fueled demand for corporate and high-yield bonds. In general, U.S. and Asian Pacific bonds outperformed European bonds.

The possibility for defaults on Greek sovereign debt payments were the main focus of investor concern, as credit-ratings agency Standard & Poor’s downgraded Greek bonds below investment grade, reflecting the perception of heightened risk. Portugal and Spain had their credit ratings downgraded as well.

Economy

Economic data continued to be mixed throughout April, as global labor markets remained weak and the slow pace of growth stayed largely the same. In the U.S., inflationary expectations remained benign as the Consumer Price Index rose by 0.1%, which was in line with expectations. While U.S. retail sales had their biggest jump in four months, consumer confidence unexpectedly fell. Both initial and continuing U.S. jobless claims remained elevated, although they began to decrease toward the end of the month. The Bank of England, the European Central Bank and the Federal Reserve (Fed) all kept interest rates at record-low levels. The Fed announced that interest rates might remain low until 2011 if economic conditions do not experience marked improvements.

We believe that national economies around the globe will continue to diverge from each other as the recovery gains momentum. Evidence of our view could be found in the range of economic news emerging from developed countries. Economic data for the U.S. continued to improve, as manufacturing and non-manufacturing activity both expanded during the month and an initial reading for first-quarter U.S. gross domestic product showed growth of 3.2%. More positive signs were seen in Germany, where business confidence rose to a two-year high in April and unemployment fell to levels last seen in mid-2008. However, Spain’s unemployment rate increased to 20%, a 13-year high, and Greek government cost-cutting was met with angry protests and strikes. Due to the integration of global capital markets, sustained growth in countries such as the U.S. and Germany depend on the continued health of economic partners such as Spain and the U.K. For this reason, investors remain skittish about sustainable global economic recovery.

Oil prices rose during April, with WTI Cushing crude oil prices ending at $86.20 per barrel. The U.S. dollar continued to display strength as investors looked for a safe-haven currency, ending the month largely unchanged at $1.53 per British pound and $1.33 per euro. The dollar was also slightly stronger versus Japanese currency, ending at around 94 yen.

Portfolio Review

 The month of April was mostly positive for SEI’s Funds. In large-cap equity, a focus on momentum contributed positively, as did an underweight to Consumer Staples. In small-cap equity, overall stock selection in the Materials and Information Technology sectors hurt performance. In international equity, an overweight to Consumer Discretionary and an underweight to Utilities helped performance.

An overweight to corporate bonds for core fixed income contributed positively to performance, as earnings reports were generally upbeat and investors felt more certain that the economic recovery would be sustainable. In high-yield bonds, an allocation to collateralized loan obligations continued to be beneficial, as these investments benefited from improving company fundamentals and a favorable technical environment, where demand outpaced supply. In emerging-market debt, security selection in Kazakhstan added to performance, especially corporate and quasi-sovereign bonds.

Contributors 

• Underweight to Consumer Staples in large-cap equity – this sector lagged for the month
• Sector allocation to Industrials in small-cap equity – security selection was favorable in this space
• Overweight to commercial mortgage-backed securities in core fixed income – this sector benefited from improving economic data
• Security selection in emerging-market debt – especially in Brazil and Mexico

Detractors 

• Quality growth bias in large-cap equity – this focus hurt as the low-quality rally continued 
• Stock selection in small-cap equity – especially in Financials 
• Stock selection in emerging-markets equity – particularly in Korea and South Africa 
• Overweight to asset-backed securities in core fixed income – this allocation slightly hurt performance 
• Underweight to Banking in high-yield bonds – positive news caused many bank bonds to soar

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 currently underweight to Healthcare and Financials. In non-U.S. equity, the managers are overweight to Information Technology and Consumer Discretionary while maintaining underweight positions in Financials and Utilities.
Our investment-grade fixed-income managers still see opportunities in corporate bonds and are reducing holdings in non-agency mortgage-backed securities. High-yield managers are underweight to the Banking sector until they see further evidence of stabilization in the global financial system and economic recovery. In emerging-markets debt, the search for higher-yielding bonds continues but security selection will be integral to adding value going forward.

Our View 

In SEI’s view, the global economy should continue to improve, but growth will not be uniform across all regions. Emerging markets are the clear leaders so far. The outlook remains uncertain for how the European recovery will progress, as uncertainty around how to handle problems with Greek sovereign debt and that of other debt-laden European nations has revealed weaknesses in the structure of the eurozone. Developed countries face a delicate balancing act. There is growing pressure on high-deficit nations to rein in government spending, but it is necessary to maintain sufficient fiscal support in order to prevent a relapse into recession.

We continue to hold a positive view toward equities, although year-to-date performance has been choppy. Fixed-income markets are being pulled in different directions. Developed-market sovereign debt has been hurt by deficit concerns, but helped by the slow recovery and generally low inflation. Emerging-market debt has been relatively strong, as investors continue to re-evaluate the relative riskiness of the asset class. Opportunities in investment-grade and high-yield bonds also remain strong, reflecting robust corporate financial positions and expectations of continued economic expansion.

The key concern, in our view, continues to be the exit from governmental stimulus packages. 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. We still believe that the key central banks—the Fed, the Bank of England and the European Central Bank—will be slow to remove economic stimuli. While we continue to see balanced opportunities in equities and fixed income, we remain cautious regarding the economic and market risks for the near term.

Global indexes and investing terminology

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. 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

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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