Market & Performance Update: Quarterly - SEI
Monthly Market Commentary August 2015
Global equity markets performed poorly in August as concerns about the broad impact of China’s selloff spread. Fixed-income markets were mixed, with emerging-market and high-yield debt serving as notable underperformers. We expect the coming weeks could continue to be volatile given unsettled questions about China and U.S. Federal Reserve policy, as well as historical stock-market seasonal trends.
Economic Backdrop Equity market declines served as the global common denominator in August, led downward by steep selloffs on China’s mainland exchanges before mounting a small, and in most locales diminishing or outright failed, recovery at month end. Central bank intervention was left to the People’s Bank of China (PBOC), which, in the absence of additional direct action following the establishment of a market-stabilization fund during July, undertook several measures. The PBOC’s yuan exchange-rate adjustment on 11 August ― signaling greater openness to a market-determined exchange rate ― resulted in its largest decline against the U.S. dollar in more than two decades. Cuts by the PBOC to both its benchmark interest rate and bank reserve requirement ratio on 25 August preceded the month’s stock-market lows in China and elsewhere. Minutes from the U.S. Federal Open Market Committee’s (FOMC) 29 July meeting reflected concerns that interest rate divergence between the U.S. and other countries could result in further dollar appreciation, which would weigh on exports and commodity prices. A late-August speech from FOMC member Stanley Fischer noted that, while inflation remains below target, FOMC actions typically have a delayed impact and therefore should be anticipatory. The Bank of England’s (BOE) Monetary Policy Committee maintained the status quo at its 6 August meeting despite the first dissenting vote of 2015 in favor of an immediate rate hike. Projected prices edged higher in the BOE’s Quarterly Inflation Report, but remained below target. The European Central Bank made no announcement in August (ahead of its 3 September meeting), but minutes from mid-July, at which policy was unchanged, indicated concerns about the global implications for China troubles and a looming U.S. rate increase, while the Greek debt dilemma was considered contained. Finally, the Bank of Japan’s (BOJ) Monetary Policy Board held rates near zero and continued apace with purchases of Japanese government bonds. Core consumer prices were expected to remain flat amid pressure from declining energy prices, which would preclude the BOJ from meeting its target. U.S. manufacturing growth decelerated in August, with new orders near recovery lows while export orders and backlogs extended multi-month contractions. Preliminary August survey findings reflected ongoing service-sector strength, as hiring remained solid amid ongoing business expansion, although new orders decelerated to a multi-month low. Homebuilders and construction spending trends both drew strength from the single-family home market during August, following a 26% year-over-year surge in new home sales through July. The unemployment rate of 5.3% and the labor-force participation rate of 62% were unchanged in July. Personal incomes moved 0.4% higher during July, while consumer spending expanded by 0.3%. Core personal consumption expenditure prices — a key inflation gauge for the Federal Reserve ― rose by 0.1% in July and 1.2% from the prior year. The U.S. economy expanded an annualized 3.7% in the second quarter, surpassing expectations. U.K. retail sales expectations for August appeared promising based on survey findings, following a marginal increase in July that reversed June’s decline. Industrial orders looked set to rebound in August, with a notable contribution from export orders. Growth in manufacturing activity moderated, with new domestic orders representing a bright spot and production edging upward, while export orders declined. Home prices continued to increase during August, but by less than in recent months, putting downward pressure on the advance from a year earlier. Consumer prices declined in July, but core inflation (which excludes food and energy prices) advanced by its fastest year-over-year pace in five months. Producer prices continued to fall, with input prices maintaining a healthy downward lead on output prices. U.K. jobless claims declined in July, and while the unemployment rate remained at 5.6% during the three months ending June, yearover-year average earnings growth decreased by 2.4%. The U.K. economy grew by 0.7% in the second quarter, exceeding first-quarter growth by 0.3% and bringing year-over-year growth to 2.6%.
© 2015 SEI
1
Eurozone services sector activity accelerated in August, joined by manufacturing to a lesser extent, for the 26th consecutive month of composite growth. Economic sentiment continued to improve during August, reaching its highest level since 2011. Consumer confidence strengthened, while industrial confidence slipped further into negative territory. Consumer prices declined in July after a flat June, but remained positive year over year by both headline and core measures. Producer prices edged downward in June, extending their decline from a year earlier. Industrial production continued to fall in June, chipping away at year-over-year growth; retail sales also declined in June, more than offsetting the prior month’s progress. The eurozone economy expanded by 0.3% in the second quarter, falling below estimates and the first-quarter rate. Market Impact Fixed-income market performance was mixed in August, notwithstanding notable losses in U.S. high-yield debt and a much steeper selloff in local-currency-denominated emerging-market debt, widening its underperformance relative to other fixed-income sources in 2015. External emerging-market debt also declined, but with much less severity than its local-currency counterpart. Global sovereign securities delivered August’s greatest returns, followed by minimal gains from U.S. asset- and mortgage-backed securities, as well as U.S. Treasurys. Global non-government debt and U.S. dollar-hedged (which seeks to reduce U.S. dollar-related volatility) global sovereign securities were modestly negative, followed on the down side by U.S. dollar-hedged global non-government debt. U.S. Treasury Inflation-Protected Securities and U.S. investment-grade corporate fixed income had deeper losses, which were still mild compared to high-yield and emerging-market debt. Global equity markets, as reflected by the components of the MSCI AC World Index (Net), declined in sympathy with one another during August. Europe was again well-represented among the top ranks, although measured in terms of the smallest losses. Ireland delivered the least negative performance, followed by Qatar, the Czech Republic, Poland and Chile. Greece had the worst performance by more than double the amount of its closest peer’s losses. Malaysia, Brazil and Hong Kong trailed Greece to the downside. China was a notable laggard as well as its losses continued to grab headlines. Global sectors all lost considerable ground in August, with financials delivering the most sizeable losses. Materials, healthcare and the consumer sectors joined financials in anchoring the bottom end of sector performance. Telecommunications had the smallest losses, followed by utilities, industrials, information technology and energy. Index Data
The Dow Jones Industrial Average Index fell by 6.20%. The S&P 500 Index declined by 6.03%. The NASDAQ Composite Index retreated by 6.70%. The MSCI AC World Index (Net), used to gauge global equity performance, declined by 6.86%. The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.12%. 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”, increased during August, moving from 12.12 to a high of 40.74 on 24 August, before ending the month at 28.43. WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $47.12 a barrel at the end of July to $49.20 on the last day in August, after having fallen to $38.09 ― its lowest level since 2009 ― on 24 August. As of this writing, oil prices were sliding considerably in early September trading. The U.S. dollar strengthened against sterling and yen, but unexpectedly weakened against the euro. The U.S. dollar ended August at $1.12 against the euro, $1.54 versus sterling and at 121.2 yen.
Portfolio Review U.S. company equities declined sharply, large and small alike, in a volatile and declining stock market environment. Cyclically-sensitive sectors delivered the best relative performance among larger companies, and energy performed well among small companies, aided by a strong rebound in concert with oil prices at month end. Traditionally defensive sectors performed poorly among large companies following recent run-ups, but led among small companies. Value outperformed growth for the first time in many months among large and small companies. Sector allocation detracted, due to a largecompany healthcare overweight and underweights to small-company consumer staples and utilities. Stock selection was negative among large companies, especially within defensive sectors, while it was a strong driver among small companies in the healthcare, consumer discretionary and industrial sectors. Overseas, an underweight to Pacific ex-Japan and exposure to Canada were beneficial, and selection within Europe was positive in aggregate. In emerging markets, positions with Asia contributed, particularly holdings in China and Malaysia. Europe, the Middle East and Africa lagged © 2015 SEI
2
slightly, with the weakest results coming from Qatar, Poland and South Africa. Latin American holdings in Brazil and Peru also underperformed, while Argentina and Chile were additive. The U.S. Treasury yield curve continued to flatten during August, benefitting a flattening bias, while a modest overweight to corporate bonds served as a drag on performance despite favorable sector positioning. Continued overweights to nonagency mortgage-backed securities (MBS) and asset-backed securities (ABS) were additive, while an underweight to agency MBS and overweight to commercial MBS detracted; security selection in ABS and commercial MBS served to offset their respective over and underperformances. The high-yield market was negative in August, so a more defensive posture and cash holdings aided relative performance. An underweight to the energy sector, along with overweights and selection within leisure, technology & electronics, and an allocation to structured credit, served to enhance relative returns. Selection within telecommunications, retail and utilities, meanwhile, weighed on performance. Within emerging markets, external debt detracted on selection and an underweight to Ukraine, selection in Argentina, and underweights to the Philippines, Lebanon, Poland and China. A significant underweight to local debt contributed on a relative basis, led by a large underweight to Malaysia; an underweight to South Africa was also positive. Selection in Indonesian and Brazilian local debt, along with an underweight to Hungary and overweight to Colombia, were modest detractors. Off-benchmark corporate debt exposure made no material contribution, while cash holdings contributed notably as almost every emerging-market currency weakened versus the U.S. dollar. 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 U.S. equities are in the latter stages of an expansion. Longer-term positioning continues to favor momentum and stability over value; however, momentum has become expensive during the last few months, and we have taken a slightly more defensive posture by starting to favor value managers as a tilt away from longer-term positioning. Internationally, the U.K. remains underweight aside from individual industrial stock-specific opportunities. Europe and Japan also continue to be underweight, as opportunities in Canada and other destinations hold greater potential promise. Within emerging markets, the long-term focus remains on the small- and mid-cap range, as well as consumer discretionary and healthcare stocks, all of which should benefit from domestic growth. Industrial stocks, particularly those positioned to benefit from infrastructure bottlenecks caused government regulations, also remain overweight. Core fixed income’s duration posture has moved closer to neutral, while maintaining a curve-flattening bias. With current spread levels moving from fair to slightly attractive, security selection is expected to play a larger role in performance. Opportunities for active management should increase if volatility remains high, and we have been selective in adding risk exposure amid recent spread widening. We retain a positive outlook on non-agency MBS given a favorable supply and demand relationship, relatively attractive risk-adjusted yields and other factors. Agency MBS remain underweight due to a lack of compelling valuations. Within corporates, managers continue to favor the financial sector on regulation-driven fundamental improvements, at the expense of industrials. In high yield, we retain a defensive posture and will be selective in new purchases given recent volatility. This defensive stance continues to be realized through bank loan and cash allocations, due particularly to the relative attractiveness of bank loan valuations. Within emerging markets, we have reduced an underweight to external debt and expanded a local debt underweight. Local debt exposures are concentrated in countries that offer relatively high yields, and the largest currency overweights are in countries that stand to benefit from the decline in commodity prices or are tied to the U.S. economic recovery. The most significant currency underweights are in low-yielding Asian currencies. Corporate debt exposure remained constant, with positions concentrated in high yieldrated companies that offer more attractive return opportunities and lower interest-rate sensitivity. Our View Investors were caught up in an escalating whirlwind during August, which centered primarily on mainland Chinese equitymarket volatility. Concern over the health of China’s economy has caused collateral damage to commodities and other emerging markets. While oil staged a partial recovery from its August lows, it remained mired in a collapse, due more to excess supply than insufficient demand. Energy’s underperformance has masked the resilience of overall corporate profitability in the U.S., which remains intact. The downward ratcheting of commodity prices stands to keep inflation below the Federal Reserve’s (Fed) target, potentially precluding an imminent increase in the Fed Funds rate. Ongoing U.S. dollar strength should give the Fed pause, especially given the likelihood that a rate hike would bolster it further ― putting greater downward pressure on commodities and reducing U.S. export competitiveness. Otherwise, concerns in recent months about the strength of the U.S. economy now seem misplaced. Strong second-quarter GDP coupled with a return to labor-market normalcy and a brightening housing outlook make the U.S. appear as one of the least-troubled destinations for investors. © 2015 SEI
3
After stumbling in June, Europe has continued to post positive economic surprises, and credit to the private sector is reviving. Eurozone exports within the currency zone have continued to climb healthily — a sign that internal demand is picking up. The bottom line is that stocks are likely to remain volatile over the coming weeks as markets remain focused on concerns about China, Fed policy actions and commodity prices. September and October have historically served as hosts to important corrections followed by major lows. In our opinion, the current sell-off has pushed stocks down into oversold territory, and although new lows may be registered, we have not fallen in a bottomless pit. Equity valuation measures have fallen and are now more attractive than they have been in some time, but remain materially above 2011 levels. We think the current correction will be less painful than 2011 and nowhere near 2008; it is possible stocks could be materially higher by year-end versus current levels. 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 should continue playing country-, sector- and company-specific opportunities, as opposed to riding a general wave of prosperity and growth. The fixed-income managers have noted liquidity concerns that continue to go unrealized. Overall, duration is modestly short among our fixed-income managers, and the U.S dollar’s ascent is expected to continue.
© 2015 SEI
4
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
5
Global equity markets performed poorly in August as concerns about the broad impact of China’s selloff spread. Fixed-income markets were mixed, with emerging-market and high-yield debt serving as notable underperformers. We expect the coming weeks could continue to be volatile given unsettled questions about China and U.S. Federal Reserve policy, as well as historical stock-market seasonal trends.
Economic Backdrop Equity market declines served as the global common denominator in August, led downward by steep selloffs on China’s mainland exchanges before mounting a small, and in most locales diminishing or outright failed, recovery at month end. Central bank intervention was left to the People’s Bank of China (PBOC), which, in the absence of additional direct action following the establishment of a market-stabilization fund during July, undertook several measures. The PBOC’s yuan exchange-rate adjustment on 11 August ― signaling greater openness to a market-determined exchange rate ― resulted in its largest decline against the U.S. dollar in more than two decades. Cuts by the PBOC to both its benchmark interest rate and bank reserve requirement ratio on 25 August preceded the month’s stock-market lows in China and elsewhere. Minutes from the U.S. Federal Open Market Committee’s (FOMC) 29 July meeting reflected concerns that interest rate divergence between the U.S. and other countries could result in further dollar appreciation, which would weigh on exports and commodity prices. A late-August speech from FOMC member Stanley Fischer noted that, while inflation remains below target, FOMC actions typically have a delayed impact and therefore should be anticipatory. The Bank of England’s (BOE) Monetary Policy Committee maintained the status quo at its 6 August meeting despite the first dissenting vote of 2015 in favor of an immediate rate hike. Projected prices edged higher in the BOE’s Quarterly Inflation Report, but remained below target. The European Central Bank made no announcement in August (ahead of its 3 September meeting), but minutes from mid-July, at which policy was unchanged, indicated concerns about the global implications for China troubles and a looming U.S. rate increase, while the Greek debt dilemma was considered contained. Finally, the Bank of Japan’s (BOJ) Monetary Policy Board held rates near zero and continued apace with purchases of Japanese government bonds. Core consumer prices were expected to remain flat amid pressure from declining energy prices, which would preclude the BOJ from meeting its target. U.S. manufacturing growth decelerated in August, with new orders near recovery lows while export orders and backlogs extended multi-month contractions. Preliminary August survey findings reflected ongoing service-sector strength, as hiring remained solid amid ongoing business expansion, although new orders decelerated to a multi-month low. Homebuilders and construction spending trends both drew strength from the single-family home market during August, following a 26% year-over-year surge in new home sales through July. The unemployment rate of 5.3% and the labor-force participation rate of 62% were unchanged in July. Personal incomes moved 0.4% higher during July, while consumer spending expanded by 0.3%. Core personal consumption expenditure prices — a key inflation gauge for the Federal Reserve ― rose by 0.1% in July and 1.2% from the prior year. The U.S. economy expanded an annualized 3.7% in the second quarter, surpassing expectations. U.K. retail sales expectations for August appeared promising based on survey findings, following a marginal increase in July that reversed June’s decline. Industrial orders looked set to rebound in August, with a notable contribution from export orders. Growth in manufacturing activity moderated, with new domestic orders representing a bright spot and production edging upward, while export orders declined. Home prices continued to increase during August, but by less than in recent months, putting downward pressure on the advance from a year earlier. Consumer prices declined in July, but core inflation (which excludes food and energy prices) advanced by its fastest year-over-year pace in five months. Producer prices continued to fall, with input prices maintaining a healthy downward lead on output prices. U.K. jobless claims declined in July, and while the unemployment rate remained at 5.6% during the three months ending June, yearover-year average earnings growth decreased by 2.4%. The U.K. economy grew by 0.7% in the second quarter, exceeding first-quarter growth by 0.3% and bringing year-over-year growth to 2.6%.
© 2015 SEI
1
Eurozone services sector activity accelerated in August, joined by manufacturing to a lesser extent, for the 26th consecutive month of composite growth. Economic sentiment continued to improve during August, reaching its highest level since 2011. Consumer confidence strengthened, while industrial confidence slipped further into negative territory. Consumer prices declined in July after a flat June, but remained positive year over year by both headline and core measures. Producer prices edged downward in June, extending their decline from a year earlier. Industrial production continued to fall in June, chipping away at year-over-year growth; retail sales also declined in June, more than offsetting the prior month’s progress. The eurozone economy expanded by 0.3% in the second quarter, falling below estimates and the first-quarter rate. Market Impact Fixed-income market performance was mixed in August, notwithstanding notable losses in U.S. high-yield debt and a much steeper selloff in local-currency-denominated emerging-market debt, widening its underperformance relative to other fixed-income sources in 2015. External emerging-market debt also declined, but with much less severity than its local-currency counterpart. Global sovereign securities delivered August’s greatest returns, followed by minimal gains from U.S. asset- and mortgage-backed securities, as well as U.S. Treasurys. Global non-government debt and U.S. dollar-hedged (which seeks to reduce U.S. dollar-related volatility) global sovereign securities were modestly negative, followed on the down side by U.S. dollar-hedged global non-government debt. U.S. Treasury Inflation-Protected Securities and U.S. investment-grade corporate fixed income had deeper losses, which were still mild compared to high-yield and emerging-market debt. Global equity markets, as reflected by the components of the MSCI AC World Index (Net), declined in sympathy with one another during August. Europe was again well-represented among the top ranks, although measured in terms of the smallest losses. Ireland delivered the least negative performance, followed by Qatar, the Czech Republic, Poland and Chile. Greece had the worst performance by more than double the amount of its closest peer’s losses. Malaysia, Brazil and Hong Kong trailed Greece to the downside. China was a notable laggard as well as its losses continued to grab headlines. Global sectors all lost considerable ground in August, with financials delivering the most sizeable losses. Materials, healthcare and the consumer sectors joined financials in anchoring the bottom end of sector performance. Telecommunications had the smallest losses, followed by utilities, industrials, information technology and energy. Index Data
The Dow Jones Industrial Average Index fell by 6.20%. The S&P 500 Index declined by 6.03%. The NASDAQ Composite Index retreated by 6.70%. The MSCI AC World Index (Net), used to gauge global equity performance, declined by 6.86%. The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.12%. 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”, increased during August, moving from 12.12 to a high of 40.74 on 24 August, before ending the month at 28.43. WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $47.12 a barrel at the end of July to $49.20 on the last day in August, after having fallen to $38.09 ― its lowest level since 2009 ― on 24 August. As of this writing, oil prices were sliding considerably in early September trading. The U.S. dollar strengthened against sterling and yen, but unexpectedly weakened against the euro. The U.S. dollar ended August at $1.12 against the euro, $1.54 versus sterling and at 121.2 yen.
Portfolio Review U.S. company equities declined sharply, large and small alike, in a volatile and declining stock market environment. Cyclically-sensitive sectors delivered the best relative performance among larger companies, and energy performed well among small companies, aided by a strong rebound in concert with oil prices at month end. Traditionally defensive sectors performed poorly among large companies following recent run-ups, but led among small companies. Value outperformed growth for the first time in many months among large and small companies. Sector allocation detracted, due to a largecompany healthcare overweight and underweights to small-company consumer staples and utilities. Stock selection was negative among large companies, especially within defensive sectors, while it was a strong driver among small companies in the healthcare, consumer discretionary and industrial sectors. Overseas, an underweight to Pacific ex-Japan and exposure to Canada were beneficial, and selection within Europe was positive in aggregate. In emerging markets, positions with Asia contributed, particularly holdings in China and Malaysia. Europe, the Middle East and Africa lagged © 2015 SEI
2
slightly, with the weakest results coming from Qatar, Poland and South Africa. Latin American holdings in Brazil and Peru also underperformed, while Argentina and Chile were additive. The U.S. Treasury yield curve continued to flatten during August, benefitting a flattening bias, while a modest overweight to corporate bonds served as a drag on performance despite favorable sector positioning. Continued overweights to nonagency mortgage-backed securities (MBS) and asset-backed securities (ABS) were additive, while an underweight to agency MBS and overweight to commercial MBS detracted; security selection in ABS and commercial MBS served to offset their respective over and underperformances. The high-yield market was negative in August, so a more defensive posture and cash holdings aided relative performance. An underweight to the energy sector, along with overweights and selection within leisure, technology & electronics, and an allocation to structured credit, served to enhance relative returns. Selection within telecommunications, retail and utilities, meanwhile, weighed on performance. Within emerging markets, external debt detracted on selection and an underweight to Ukraine, selection in Argentina, and underweights to the Philippines, Lebanon, Poland and China. A significant underweight to local debt contributed on a relative basis, led by a large underweight to Malaysia; an underweight to South Africa was also positive. Selection in Indonesian and Brazilian local debt, along with an underweight to Hungary and overweight to Colombia, were modest detractors. Off-benchmark corporate debt exposure made no material contribution, while cash holdings contributed notably as almost every emerging-market currency weakened versus the U.S. dollar. 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 U.S. equities are in the latter stages of an expansion. Longer-term positioning continues to favor momentum and stability over value; however, momentum has become expensive during the last few months, and we have taken a slightly more defensive posture by starting to favor value managers as a tilt away from longer-term positioning. Internationally, the U.K. remains underweight aside from individual industrial stock-specific opportunities. Europe and Japan also continue to be underweight, as opportunities in Canada and other destinations hold greater potential promise. Within emerging markets, the long-term focus remains on the small- and mid-cap range, as well as consumer discretionary and healthcare stocks, all of which should benefit from domestic growth. Industrial stocks, particularly those positioned to benefit from infrastructure bottlenecks caused government regulations, also remain overweight. Core fixed income’s duration posture has moved closer to neutral, while maintaining a curve-flattening bias. With current spread levels moving from fair to slightly attractive, security selection is expected to play a larger role in performance. Opportunities for active management should increase if volatility remains high, and we have been selective in adding risk exposure amid recent spread widening. We retain a positive outlook on non-agency MBS given a favorable supply and demand relationship, relatively attractive risk-adjusted yields and other factors. Agency MBS remain underweight due to a lack of compelling valuations. Within corporates, managers continue to favor the financial sector on regulation-driven fundamental improvements, at the expense of industrials. In high yield, we retain a defensive posture and will be selective in new purchases given recent volatility. This defensive stance continues to be realized through bank loan and cash allocations, due particularly to the relative attractiveness of bank loan valuations. Within emerging markets, we have reduced an underweight to external debt and expanded a local debt underweight. Local debt exposures are concentrated in countries that offer relatively high yields, and the largest currency overweights are in countries that stand to benefit from the decline in commodity prices or are tied to the U.S. economic recovery. The most significant currency underweights are in low-yielding Asian currencies. Corporate debt exposure remained constant, with positions concentrated in high yieldrated companies that offer more attractive return opportunities and lower interest-rate sensitivity. Our View Investors were caught up in an escalating whirlwind during August, which centered primarily on mainland Chinese equitymarket volatility. Concern over the health of China’s economy has caused collateral damage to commodities and other emerging markets. While oil staged a partial recovery from its August lows, it remained mired in a collapse, due more to excess supply than insufficient demand. Energy’s underperformance has masked the resilience of overall corporate profitability in the U.S., which remains intact. The downward ratcheting of commodity prices stands to keep inflation below the Federal Reserve’s (Fed) target, potentially precluding an imminent increase in the Fed Funds rate. Ongoing U.S. dollar strength should give the Fed pause, especially given the likelihood that a rate hike would bolster it further ― putting greater downward pressure on commodities and reducing U.S. export competitiveness. Otherwise, concerns in recent months about the strength of the U.S. economy now seem misplaced. Strong second-quarter GDP coupled with a return to labor-market normalcy and a brightening housing outlook make the U.S. appear as one of the least-troubled destinations for investors. © 2015 SEI
3
After stumbling in June, Europe has continued to post positive economic surprises, and credit to the private sector is reviving. Eurozone exports within the currency zone have continued to climb healthily — a sign that internal demand is picking up. The bottom line is that stocks are likely to remain volatile over the coming weeks as markets remain focused on concerns about China, Fed policy actions and commodity prices. September and October have historically served as hosts to important corrections followed by major lows. In our opinion, the current sell-off has pushed stocks down into oversold territory, and although new lows may be registered, we have not fallen in a bottomless pit. Equity valuation measures have fallen and are now more attractive than they have been in some time, but remain materially above 2011 levels. We think the current correction will be less painful than 2011 and nowhere near 2008; it is possible stocks could be materially higher by year-end versus current levels. 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 should continue playing country-, sector- and company-specific opportunities, as opposed to riding a general wave of prosperity and growth. The fixed-income managers have noted liquidity concerns that continue to go unrealized. Overall, duration is modestly short among our fixed-income managers, and the U.S dollar’s ascent is expected to continue.
© 2015 SEI
4
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
5
