Market & Performance Update: Quarterly - SEI
Monthly Market Commentary July 2015
Global equity markets advanced in July, led by Europe, as emerging markets foundered. Fixed-income markets were mostly positive, with U.S. dollar strength weighing on non-dollar-denominated returns. Our equity investment managers remain pro-cyclical; fixed-income managers retain a modest short-duration bias.
Economic Backdrop Major central banks began the second half of 2015 on familiar footing. The Bank of England’s (BOE) Monetary Policy Committee held firm on the Bank Rate and size of its balance sheet as modest economic reports lent support to the Committee’s view that a rate increase would likely not be warranted this year. The European Central Bank (ECB), citing signs of economic progress, was clear that its bond purchases of €60 billion per month would run through summer 2016 barring any substantial unforeseen changes. Notably, the ECB increased emergency-loan assistance to Greek banks, which spent much of July shuttered amid capital-control measures, prior to receiving a €4.2 billion loan repayment from the Greek government. The U.S. Federal Open Market Committee (FOMC) maintained a near-zero Federal Funds target rate. Federal Reserve (Fed) Chair Janet Yellen expressed an expectation for rate hikes to begin this year and progress gradually; the latest FOMC meeting minutes acknowledged progress toward the economic conditions required to begin increasing rates. Finally, the Bank of Japan (BOJ) kept its benchmark rate near zero and continued its ¥80 trillion assetpurchase program. The BOJ’s Monetary Policy Board noted that long-term inflation measures are showing growth but short-term prices have been flat given the downward pressure from energy prices. The BOJ also announced it will conform to an FOMC-style eight-meeting schedule beginning in 2016. The U.S. economy expanded 2.3% in the second quarter, accelerating from the first quarter’s 0.6% rate (revised up from -0.2%). Initial jobless claims declined to a 42-year low during July, and the June unemployment rate fell to 5.3%, although labor force participation dwindled to its lowest point since 1977. Employment costs delivered the smallest advance in the report’s three-decade existence during the second quarter, and year-over-year growth settled to a nearrecord low. Personal incomes, meanwhile, increased by 0.4% in June and 4.1% over the prior year, ahead of consumer spending rates for both time periods. Manufacturing and service sector activity accelerated in July, according to early surveys, after decelerating in June. Industrial production increased in June for the first time in six months; durable goods orders rebounded as orders for core goods (excluding aircraft) climbed. Sales at the retail level, however, slowed across multiple industries. Consumer prices moved higher in June and year over year following a flat May; core prices (which exclude volatile items such as food and gasoline) increased over both time frames. Producer prices rose in June, but remained negative (excluding services) from a year earlier. Existing home sales accelerated in June to a rate not seen since 2007, while new home sales dropped amid downward revisions to April and May’s reports. New home permits reached an eight-year peak. The U.K. economy expanded 0.7% in the second quarter, exceeding the first quarter’s 0.4% growth rate but slowing on a year-over-year basis. The labor market was mixed, with jobless claims increasing in June for the first time since 2012 and the unemployment rate edging up during the three months ending in May; however, average year-over-year wage growth accelerated in the same time period. Retail sales fell to a 10-month low in June, and a survey of retailers indicates sales may continue to slide in July. Consumer price inflation registered no change in June from both a month and year earlier; producer output prices were also flat from a month earlier, while input prices contracted. Manufacturing sector activity decelerated to its slowest pace in two years during June, furthering a two-month trend that, according to survey findings, continued through July. Activity in the service and construction sectors, meanwhile, accelerated. Eurozone manufacturing and service sector activity accelerated in June before moderating in July, according to preliminary survey findings. Economic sentiment delivered a small rebound in July, interrupting a three-month trend of flatto-lower confidence, while consumer confidence weakened to multi-month lows in June. The unemployment rate held at 11.1% in June for the third consecutive month, and youth unemployment worsened. Consumer prices increased in July, according to preliminary data, repeating June’s advance; producer prices were flat in May, based on the most recent available data, and negative over the prior year. Retail sales recorded the sixth gain in eight months during May, albeit at a slower pace than in April, with food, alcohol, tobacco and non-food sales serving as major contributors. Seasonallyadjusted construction-sector production advanced in May, while industrial production declined. © 2015 SEI
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Market Impact Fixed-income market performance was mostly positive in July. U.S. dollar-hedged (which seeks to reduce U.S. dollarrelated volatility) global securities performed better than their unhedged counterparts due to dollar strengthening during July. Hedged global sovereign debt delivered the best performance, followed by U.S. Treasurys. Hedged global nongovernment debt also performed well, along with U.S. investment-grade corporate debt, the second quarter’s poorest performer. U.S. mortgage-backed securities (MBS) followed closely and external emerging-market debt delivered a healthy, if not strong, return. Unhedged global sovereign and non-government debt had modestly positive performances, and were joined by U.S. asset-backed securities (ABS), the source of the second quarter’s only positive return. Localcurrency-denominated emerging-market debt delivered July’s most notable fixed-income losses, and trails all other sources thus far in 2015, as emerging-market currencies continued to weaken relative to developed-country currencies. U.S. high-yield debt was also negative in July, but remains one of the top-performing fixed-income sources this year. U.S. Treasury Inflation-Protected Securities had negligible losses during the month. Global equity markets, as reflected by the MSCI AC World Index (Net), advanced during July. Europe dominated the topten performing countries, but ceded the greatest gains to Israel, which led by an impressive margin. Denmark, France, Hungary and Ireland rounded out the top five. The U.S., India and U.K. followed the full slate of European leaders with healthy returns. Emerging markets generally fared poorly, with Latin America and Asia delivering particularly disappointing performances. Brazil fell by the most in July, followed by China, Colombia, Peru and Korea. The global consumer staples sector rebounded from a negative second quarter to deliver July’s best performance. Healthcare followed, while maintaining leadership over the trailing three-, six- and 12-month periods. Utilities also had notably strong returns after earning the second quarter’s worst performance. Energy delivered July’s steepest losses, settling back into last place over the preceding three, six and 12 months. Materials represented the only other negative performance in July, and was substantially so, while industrials was essentially flat. Index Data
The Dow Jones Industrial Average Index fell by 2.06%. The S&P 500 Index declined by 1.94%. The NASDAQ Composite Index retreated by 1.56%. The MSCI AC World Index (Net), used to gauge global equity performance, advanced by 0.87%. The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.22%. 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”, decreased in the month as a whole, moving from 18.23 to 12.12, nearly matching the lowest level of 2015. WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $59.47 a barrel at the end of June to $47.12 on the last day in July. Global oil markets remain well supplied, with additional Iranian supply possibly coming online after a tentative nuclear deal with the U.S., while demand has been tepid. The U.S. dollar strengthened against the euro, sterling and yen. The U.S. dollar ended July at $1.10 against the euro, $1.56 versus sterling and at 123.9 yen.
Portfolio Review Large U.S. companies generally performed well in July, while small companies retreated, as the most cyclically-sensitive sectors trailed their defensive and less cyclically-sensitive counterparts. Growth strategies extended their outperformance over value strategies across the capitalization range. Sector allocation was positive among large caps, led by an underweight to materials and industrials, while small-cap sector positioning detracted as a result of overweights to energy and industrials. Stock selection was beneficial overall, namely among large-cap industrial, healthcare and technology companies; and small-cap energy and materials companies. Internationally, underweights and stock selection within Japan and the U.K. contributed; performance in Europe was positive ― particularly via strong selection in Belgium, Ireland and Switzerland, although holdings in Germany and the Netherlands performed poorly. An overweight to Israel and underweight to Pacific ex Japan were also additive. In emerging markets, holdings in China and Korea produced strong relative outperformance, and positioning in Russia contributed. Latin America, meanwhile, was pressured by poor results in Brazil. The U.S. Treasury yield curve flattened in July, enhancing relative performance, but this was partially offset by a modestly shorter duration as yields rose. A slight overweight to corporate credit weighed on performance, although an emphasis on the financial sector and underweights to industrials and utilities were positive. An underweight to sovereign bonds supported relative performance. Continued overweights to non-agency and commercial MBS, and underweight to © 2015 SEI
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agencies performed relatively well. An overweight to asset-backed securities also contributed. Within high yield, underweights and selection within the energy and basic industry sectors, along with an underweight to media and an allocation to structured credit, contributed. Selection within utility, retail and technology and electronics detracted. The high-yield market was negative during July, so a more defensive posture and cash holdings aided relative performance. In emerging markets, external-debt country selection and local-debt currency exposures weighed on performance, while corporate debt served as the most significant contributor. Manager Positioning and Opportunities SEI’s portfolio managers rely on investment-manager selection and portfolio construction in an effort to deliver diversified sources of excess return for our portfolios. We believe large U.S. companies are in the middle stage of a modest expansion, while smaller companies are in the latter stages. Valuations for momentum stocks have become quite stretched and SEI is actively tempering exposure, with positioning tilting in favor of value-oriented stocks. Macro events have influenced markets on a short-term basis, but SEI’s focus remains on the breadth and strength of top-line revenue and overall earnings growth that will justify the next leg of a normal market expansion. Overseas, the U.K. remains underweight excluding stock-specific opportunities in the industrial sector. Europe and Japan are also underweight in favor of off-benchmark opportunities in Canada and elsewhere. Within emerging markets, the emphasis remains on consumer discretionary and healthcare stocks that stand to benefit from a growing middle class, as well as specific industrial stocks that are positioned to benefit from regulatory bottlenecks. Core fixed income retained a modest short-duration and curve-flattening posture. Security selection is expected to play an increasing role in performance with current spread levels reflecting fair value and opportunities for active management should increase if volatility remains high. We continue to overweight non-agency MBS; agency MBS valuations, meanwhile, are not compelling enough to begin reducing their underweight. Within the corporate sector, financials remain overweight on the virtue of heightened capital requirements, while industrials remain underweight amid energy-driven volatility. Within high yield, we maintain a slightly defensive orientation and, with regard to new purchases, managers will be selective given recent volatility. A defensive posture ― via allocations to bank loans and cash ― will remain, especially given relatively attractive bank loan valuations. In emerging markets, we slightly reduced an external debt underweight and expanded an underweight to local-currency debt, while maintaining off-benchmark exposure to corporate debt. The latter tends to be geared geographically to Asia and away from Latin American and Europe, and is concentrated in high yield-rated companies with attractive potential returns and relatively low interest-rate sensitivity. Our View Investors remained caught up in a whirlwind during July, which centered primarily on mainland Chinese equity-market volatility, the shutdown of the Greek banking system as the latest stage of the country’s debt crisis culminated in a new bailout, and concerns over a municipal-debt default in Puerto Rico. The resiliency of eurozone equities has a simple explanation: The regional economy is starting to improve, albeit in a slow and halting fashion. Eurozone exports within the currency zone have climbed more than exports outside the currency zone — a sign that internal demand is picking up. SEI believes recent data may be overstating the extent of U.S. weakness. First, both employment and average weekly earnings are on the rise. Second, net worth has increased — thanks to the recovery in home values and the bull market in financial assets. Third, households now are in a position to take on more debt. In a mild-to-moderate growth scenario, U.S. corporate profits and cash flow should grind their way higher. Companies are finding ways to overcome the headwinds of a sluggish economy and weak top-line growth. This ability to manage costs in recent months far exceeded expectations at the start of the latest earnings reporting season. The divergence between the U.S. FOMC’s intimations that the first interest-rate hike could come in September and what futures traders are expecting suggests that financial markets are vulnerable to a rise in volatility. Our equity investment managers generally remain pro-cyclical; momentum appears expensive in the U.S, but competitively valued overseas. Larger Asian economies look favorable despite China’s equity-market decline, while energy-sector reverberations continue to be responsible for many global pressures and opportunities. Investors in emerging markets will need to continue playing country-, sector- and company-specific opportunities, as opposed to riding a general wave of prosperity and growth. Fixed-income managers have noted liquidity concerns that are largely unrealized. Overall, duration is modestly short among our fixed-income managers, and the U.S dollar’s ascent is expected to continue. © 2015 SEI
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Benchmark Descriptions The Dow Jones Industrial Average is a widely followed market indicator based on a price-weighted average of 30 bluechip New York Stock Exchange stocks that are selected by editors of The Wall Street Journal. The S&P 500 Index is a capitalization-weighted index made up of 500 widely held U.S. large-cap companies. 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 MSCI All Country World Index is a market capitalization-weighted index composed of over 2,000 companies, representing 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 EMU Index (European Economic and Monetary Union) Index is a free float-adjusted market-capitalization weighted index that is designed to measure the equity market performance of countries within EMU. The MSCI EMU Index consists of the following 10 developed-market country indexes: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain. The Barclays 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 Chicago Board Options Exchange Volatility Index (VIX) tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.
Definitions One basis point equals 0.01%.
Disclosures 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 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. Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI). Neither SEI nor its subsidiaries are affiliated with your financial advisor. © 2015 SEI
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Global equity markets advanced in July, led by Europe, as emerging markets foundered. Fixed-income markets were mostly positive, with U.S. dollar strength weighing on non-dollar-denominated returns. Our equity investment managers remain pro-cyclical; fixed-income managers retain a modest short-duration bias.
Economic Backdrop Major central banks began the second half of 2015 on familiar footing. The Bank of England’s (BOE) Monetary Policy Committee held firm on the Bank Rate and size of its balance sheet as modest economic reports lent support to the Committee’s view that a rate increase would likely not be warranted this year. The European Central Bank (ECB), citing signs of economic progress, was clear that its bond purchases of €60 billion per month would run through summer 2016 barring any substantial unforeseen changes. Notably, the ECB increased emergency-loan assistance to Greek banks, which spent much of July shuttered amid capital-control measures, prior to receiving a €4.2 billion loan repayment from the Greek government. The U.S. Federal Open Market Committee (FOMC) maintained a near-zero Federal Funds target rate. Federal Reserve (Fed) Chair Janet Yellen expressed an expectation for rate hikes to begin this year and progress gradually; the latest FOMC meeting minutes acknowledged progress toward the economic conditions required to begin increasing rates. Finally, the Bank of Japan (BOJ) kept its benchmark rate near zero and continued its ¥80 trillion assetpurchase program. The BOJ’s Monetary Policy Board noted that long-term inflation measures are showing growth but short-term prices have been flat given the downward pressure from energy prices. The BOJ also announced it will conform to an FOMC-style eight-meeting schedule beginning in 2016. The U.S. economy expanded 2.3% in the second quarter, accelerating from the first quarter’s 0.6% rate (revised up from -0.2%). Initial jobless claims declined to a 42-year low during July, and the June unemployment rate fell to 5.3%, although labor force participation dwindled to its lowest point since 1977. Employment costs delivered the smallest advance in the report’s three-decade existence during the second quarter, and year-over-year growth settled to a nearrecord low. Personal incomes, meanwhile, increased by 0.4% in June and 4.1% over the prior year, ahead of consumer spending rates for both time periods. Manufacturing and service sector activity accelerated in July, according to early surveys, after decelerating in June. Industrial production increased in June for the first time in six months; durable goods orders rebounded as orders for core goods (excluding aircraft) climbed. Sales at the retail level, however, slowed across multiple industries. Consumer prices moved higher in June and year over year following a flat May; core prices (which exclude volatile items such as food and gasoline) increased over both time frames. Producer prices rose in June, but remained negative (excluding services) from a year earlier. Existing home sales accelerated in June to a rate not seen since 2007, while new home sales dropped amid downward revisions to April and May’s reports. New home permits reached an eight-year peak. The U.K. economy expanded 0.7% in the second quarter, exceeding the first quarter’s 0.4% growth rate but slowing on a year-over-year basis. The labor market was mixed, with jobless claims increasing in June for the first time since 2012 and the unemployment rate edging up during the three months ending in May; however, average year-over-year wage growth accelerated in the same time period. Retail sales fell to a 10-month low in June, and a survey of retailers indicates sales may continue to slide in July. Consumer price inflation registered no change in June from both a month and year earlier; producer output prices were also flat from a month earlier, while input prices contracted. Manufacturing sector activity decelerated to its slowest pace in two years during June, furthering a two-month trend that, according to survey findings, continued through July. Activity in the service and construction sectors, meanwhile, accelerated. Eurozone manufacturing and service sector activity accelerated in June before moderating in July, according to preliminary survey findings. Economic sentiment delivered a small rebound in July, interrupting a three-month trend of flatto-lower confidence, while consumer confidence weakened to multi-month lows in June. The unemployment rate held at 11.1% in June for the third consecutive month, and youth unemployment worsened. Consumer prices increased in July, according to preliminary data, repeating June’s advance; producer prices were flat in May, based on the most recent available data, and negative over the prior year. Retail sales recorded the sixth gain in eight months during May, albeit at a slower pace than in April, with food, alcohol, tobacco and non-food sales serving as major contributors. Seasonallyadjusted construction-sector production advanced in May, while industrial production declined. © 2015 SEI
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Market Impact Fixed-income market performance was mostly positive in July. U.S. dollar-hedged (which seeks to reduce U.S. dollarrelated volatility) global securities performed better than their unhedged counterparts due to dollar strengthening during July. Hedged global sovereign debt delivered the best performance, followed by U.S. Treasurys. Hedged global nongovernment debt also performed well, along with U.S. investment-grade corporate debt, the second quarter’s poorest performer. U.S. mortgage-backed securities (MBS) followed closely and external emerging-market debt delivered a healthy, if not strong, return. Unhedged global sovereign and non-government debt had modestly positive performances, and were joined by U.S. asset-backed securities (ABS), the source of the second quarter’s only positive return. Localcurrency-denominated emerging-market debt delivered July’s most notable fixed-income losses, and trails all other sources thus far in 2015, as emerging-market currencies continued to weaken relative to developed-country currencies. U.S. high-yield debt was also negative in July, but remains one of the top-performing fixed-income sources this year. U.S. Treasury Inflation-Protected Securities had negligible losses during the month. Global equity markets, as reflected by the MSCI AC World Index (Net), advanced during July. Europe dominated the topten performing countries, but ceded the greatest gains to Israel, which led by an impressive margin. Denmark, France, Hungary and Ireland rounded out the top five. The U.S., India and U.K. followed the full slate of European leaders with healthy returns. Emerging markets generally fared poorly, with Latin America and Asia delivering particularly disappointing performances. Brazil fell by the most in July, followed by China, Colombia, Peru and Korea. The global consumer staples sector rebounded from a negative second quarter to deliver July’s best performance. Healthcare followed, while maintaining leadership over the trailing three-, six- and 12-month periods. Utilities also had notably strong returns after earning the second quarter’s worst performance. Energy delivered July’s steepest losses, settling back into last place over the preceding three, six and 12 months. Materials represented the only other negative performance in July, and was substantially so, while industrials was essentially flat. Index Data
The Dow Jones Industrial Average Index fell by 2.06%. The S&P 500 Index declined by 1.94%. The NASDAQ Composite Index retreated by 1.56%. The MSCI AC World Index (Net), used to gauge global equity performance, advanced by 0.87%. The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.22%. 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”, decreased in the month as a whole, moving from 18.23 to 12.12, nearly matching the lowest level of 2015. WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $59.47 a barrel at the end of June to $47.12 on the last day in July. Global oil markets remain well supplied, with additional Iranian supply possibly coming online after a tentative nuclear deal with the U.S., while demand has been tepid. The U.S. dollar strengthened against the euro, sterling and yen. The U.S. dollar ended July at $1.10 against the euro, $1.56 versus sterling and at 123.9 yen.
Portfolio Review Large U.S. companies generally performed well in July, while small companies retreated, as the most cyclically-sensitive sectors trailed their defensive and less cyclically-sensitive counterparts. Growth strategies extended their outperformance over value strategies across the capitalization range. Sector allocation was positive among large caps, led by an underweight to materials and industrials, while small-cap sector positioning detracted as a result of overweights to energy and industrials. Stock selection was beneficial overall, namely among large-cap industrial, healthcare and technology companies; and small-cap energy and materials companies. Internationally, underweights and stock selection within Japan and the U.K. contributed; performance in Europe was positive ― particularly via strong selection in Belgium, Ireland and Switzerland, although holdings in Germany and the Netherlands performed poorly. An overweight to Israel and underweight to Pacific ex Japan were also additive. In emerging markets, holdings in China and Korea produced strong relative outperformance, and positioning in Russia contributed. Latin America, meanwhile, was pressured by poor results in Brazil. The U.S. Treasury yield curve flattened in July, enhancing relative performance, but this was partially offset by a modestly shorter duration as yields rose. A slight overweight to corporate credit weighed on performance, although an emphasis on the financial sector and underweights to industrials and utilities were positive. An underweight to sovereign bonds supported relative performance. Continued overweights to non-agency and commercial MBS, and underweight to © 2015 SEI
2
agencies performed relatively well. An overweight to asset-backed securities also contributed. Within high yield, underweights and selection within the energy and basic industry sectors, along with an underweight to media and an allocation to structured credit, contributed. Selection within utility, retail and technology and electronics detracted. The high-yield market was negative during July, so a more defensive posture and cash holdings aided relative performance. In emerging markets, external-debt country selection and local-debt currency exposures weighed on performance, while corporate debt served as the most significant contributor. Manager Positioning and Opportunities SEI’s portfolio managers rely on investment-manager selection and portfolio construction in an effort to deliver diversified sources of excess return for our portfolios. We believe large U.S. companies are in the middle stage of a modest expansion, while smaller companies are in the latter stages. Valuations for momentum stocks have become quite stretched and SEI is actively tempering exposure, with positioning tilting in favor of value-oriented stocks. Macro events have influenced markets on a short-term basis, but SEI’s focus remains on the breadth and strength of top-line revenue and overall earnings growth that will justify the next leg of a normal market expansion. Overseas, the U.K. remains underweight excluding stock-specific opportunities in the industrial sector. Europe and Japan are also underweight in favor of off-benchmark opportunities in Canada and elsewhere. Within emerging markets, the emphasis remains on consumer discretionary and healthcare stocks that stand to benefit from a growing middle class, as well as specific industrial stocks that are positioned to benefit from regulatory bottlenecks. Core fixed income retained a modest short-duration and curve-flattening posture. Security selection is expected to play an increasing role in performance with current spread levels reflecting fair value and opportunities for active management should increase if volatility remains high. We continue to overweight non-agency MBS; agency MBS valuations, meanwhile, are not compelling enough to begin reducing their underweight. Within the corporate sector, financials remain overweight on the virtue of heightened capital requirements, while industrials remain underweight amid energy-driven volatility. Within high yield, we maintain a slightly defensive orientation and, with regard to new purchases, managers will be selective given recent volatility. A defensive posture ― via allocations to bank loans and cash ― will remain, especially given relatively attractive bank loan valuations. In emerging markets, we slightly reduced an external debt underweight and expanded an underweight to local-currency debt, while maintaining off-benchmark exposure to corporate debt. The latter tends to be geared geographically to Asia and away from Latin American and Europe, and is concentrated in high yield-rated companies with attractive potential returns and relatively low interest-rate sensitivity. Our View Investors remained caught up in a whirlwind during July, which centered primarily on mainland Chinese equity-market volatility, the shutdown of the Greek banking system as the latest stage of the country’s debt crisis culminated in a new bailout, and concerns over a municipal-debt default in Puerto Rico. The resiliency of eurozone equities has a simple explanation: The regional economy is starting to improve, albeit in a slow and halting fashion. Eurozone exports within the currency zone have climbed more than exports outside the currency zone — a sign that internal demand is picking up. SEI believes recent data may be overstating the extent of U.S. weakness. First, both employment and average weekly earnings are on the rise. Second, net worth has increased — thanks to the recovery in home values and the bull market in financial assets. Third, households now are in a position to take on more debt. In a mild-to-moderate growth scenario, U.S. corporate profits and cash flow should grind their way higher. Companies are finding ways to overcome the headwinds of a sluggish economy and weak top-line growth. This ability to manage costs in recent months far exceeded expectations at the start of the latest earnings reporting season. The divergence between the U.S. FOMC’s intimations that the first interest-rate hike could come in September and what futures traders are expecting suggests that financial markets are vulnerable to a rise in volatility. Our equity investment managers generally remain pro-cyclical; momentum appears expensive in the U.S, but competitively valued overseas. Larger Asian economies look favorable despite China’s equity-market decline, while energy-sector reverberations continue to be responsible for many global pressures and opportunities. Investors in emerging markets will need to continue playing country-, sector- and company-specific opportunities, as opposed to riding a general wave of prosperity and growth. Fixed-income managers have noted liquidity concerns that are largely unrealized. Overall, duration is modestly short among our fixed-income managers, and the U.S dollar’s ascent is expected to continue. © 2015 SEI
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Benchmark Descriptions The Dow Jones Industrial Average is a widely followed market indicator based on a price-weighted average of 30 bluechip New York Stock Exchange stocks that are selected by editors of The Wall Street Journal. The S&P 500 Index is a capitalization-weighted index made up of 500 widely held U.S. large-cap companies. 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 MSCI All Country World Index is a market capitalization-weighted index composed of over 2,000 companies, representing 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 EMU Index (European Economic and Monetary Union) Index is a free float-adjusted market-capitalization weighted index that is designed to measure the equity market performance of countries within EMU. The MSCI EMU Index consists of the following 10 developed-market country indexes: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain. The Barclays 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 Chicago Board Options Exchange Volatility Index (VIX) tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.
Definitions One basis point equals 0.01%.
Disclosures 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 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. Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI). Neither SEI nor its subsidiaries are affiliated with your financial advisor. © 2015 SEI
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