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 SEIâ€™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 SEIâ€™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 portfoliosâ€™ 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
In our global fixed-income portfolios, we are generally underweight to both the euro and debt issued by the eurozone. Additionally, our direct exposure to Greece as of April 30, 2010 is limitedâ€”less than 1% in most cases. As global spreads have tightened over the past year, we have used this opportunity to reduce risk in our fixed-income portfolios.
In our alternative investment portfolios, we have the ability to implement tactical levers to take advantage of higher volatility over the short term. By including these strategies, we intend to exploit market dislocations during periods of uncertainty in the markets. Summary SEI believes that the best approach to investing is one that focuses on diversified portfolios designed to provide consistent returns over a certain time horizon in accordance with an investorâ€™s risk profile. Our investment professionals pride themselves on constructing portfolios that include a broad array of securities and underlying investment managers. Our strategies are further diversified through a composition of a variety of asset classes based on long-term capital market assumptions. We continue to monitor day-to-day events, but weekly, monthly and even quarterly market movements are often little more than noise for a portfolio that has a time horizon of five years or longer. In short, SEI believes it is important for long-term investors to be patient when faced with panicinducing headlines. If investment time horizons are measured in years, it does no good to worry about day-to-day reports of doom and gloom. As the current crisis continues to mend, we believe some of the best defenses investors have at their disposal may be diversified investment portfolios.
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