Investment Update Regarding Recent Market Volatility The past few weeks have been challenging for market participants, as uncertainty has led to high market volatility and increasing investor anxiety. Doubts have grown about the ability of the Greek government to pay its debts, and fears of contagion to other debt-laden countries in peripheral Europe have escalated as well.1 To add further fuel to the fire, the Dow Jones Industrial Average plunged nearly 1,000 points intra-day on May 6 before recovering significantly, ending the day down just over 300 points. This drop was significant, but it appears the 1,000-point intra-day sell-off may be linked to a single trading error or issues with automated trading systems. Our View In SEI’s view, a market correction is not unexpected. In the past 12 months, both equity and fixed-income markets, as measured by the MSCI AC World Index and Barclays Capital Global Aggregate Bond Index, have increased dramatically off the lows reached during the 2008 financial crisis. For the one-year period ending April 30, these indexes have gained 39.3% and 9.26%, respectively. Although the global economy has begun its recovery, growth remains varied among regions but mostly slow due to weak labor markets. We expected the emerging markets to lead the world out of the recession, which has been largely the case thus far, and we believe the U.S. should continue its return to a healthy pace of economic output over the next few years. Risks to our view include the ongoing sovereign debt crisis in peripheral Europe, monetary policy tightening in high-growth areas such as China and India, as well as domestic issues such as higher taxes and increased regulation.2 SEI Fund Positioning Coming out of the market downturn, SEI implemented enhancements to our investment process that involved incorporating forward-looking expectations of the economic cycle into our portfolioconstruction process. This process includes increasing weightings at the margins of our diversified manager-of-managers Funds to investment managers whose skill sets are believed to perform particularly well during certain market environments. As stated earlier, we believe that the securities that benefited most during the initial recovery in 2009 would not be the same ones to lead as the recovery matures. In response, we began transitioning many of our equity portfolios to increase allocations toward high-quality stocks at the beginning of this year in anticipation of changing market dynamics. The ability to tilt our portfolios in accordance with where we believe the global markets and economy are headed is intended to produce consistent returns for investors. After the events of this past week, we are confident that our enhancements are providing the intended results. An overview follows regarding how each of SEI’s major asset classes is positioned:
In our equity portfolios, we have generally been underweight to areas of concern, such as country exposures to peripheral Europe and sector exposures such as Financials. We believe that our portfolios’ lower beta may help to better withstand the effects of a market pull-back. We have increased defensive positioning by allocating more to higher-quality stocks as the market rally matures. These types of companies normally fare better in periods of downward market pressure because they have less debt and more market share. In addition, our managedvolatility portfolios are designed to reduce downside market capture and, as demonstrated in 2008, continue to provide investors with equity exposure while limiting downside risk. During the volatile trading events on May 6, the SIMT U.S. Managed Volatility Fund fell less than the Russell 3000 Index, demonstrating its defensive nature.3